protox therapeutics 2008 annual report

Targeted Therapies2008 Annual Report

Protox Therapeutics is a leader in advancing novel, receptor targeted fusion proteins. Our lead compound, PRX302, is a revolutionary drug to treat diseases of the prostate. Positive Phase 2 results from our open-label clinical program for benign prostatic hyperplasia (BPH or enlarged prostate) were released in the fourth quarter of 2008, highlighting the ability of PRX302 to provide significant symptomatic relief with an excellent safety profile. PRX302 is currently being studied in a Phase 2 randomized, placebo controlled trial (TRIUMPH) with results expected in 2009.

Enlarged prostate is the most common health problem in men over 60.

PRX302 is a targeted pro-drug designed to be activated into a potent agent by prostate specific antigen (PSA). When injected directly into the prostate gland under ultrasound guidance, PRX302 selectively destroys PSA producing prostatic tissue (BPH) and tumour cells (prostate cancer).

Drugs PRX302

Blockbuster Opportunity

Phase 2 TRIUMPH data – Q4 09

Surgery

Life time treatment•

Sexual dysfunction•

Drug / drug interactions •

Mild to moderate symptom relief•

Hypotension•

Fatigue, dizziness & headaches•

Single treatment•

No sexual dysfunction•

No catheter required•

Rapid & durable symptom relief •

No cardiovascular effects•

Excellent safety profile • & simple procedure

Potential first line therapy•

Hospitalization•

Sexual dysfunction•

Catheter required•

Long recovery time•

Blood pressure surge (TUMT)•

Bleeding / infection•

Improvement in BPH Symptoms (IPSS)

0 -2 -4 -6 -8 -10 -12 -14

drugs surgery

PRX302*

* 90-day Phase 2 study data

$3 Billion annual sales

575,000annual procedures

Letter to Shareholders

Dear Shareholder,

Our focus for 2008 was to make significant advances on both the clinical and corporate front as we endeavor to become a leader in the emerging field of receptor targeted fusion proteins. We are very pleased with our accomplishments over the past year – 2008 marked the release of very promising data from both our Phase 1 and Phase 2 studies of PRX302 for the treatment of moderate to severe benign prostatic hyperplasia (BPH). As we enter the realm of later stage development for BPH, I believe that we may be on the verge of something truly exciting.

BPH is a non-cancerous enlargement of the prostate gland that often leads to uncomfortable and eventually debilitating urinary problems and afflicts more than 50 million middle-aged and elderly men in North America, Europe, and Japan.

Existing therapies for BPH do not adequately meet patient needs due to their slow onset of action, inability to address the underlying problem of prostate enlargement, or side effects that include sexual dysfunction and cardiovascular effects. PRX302, appears to address both the symptoms and the underlying cause of this disease without the side effects and has the potential to dramatically improve the medical treatment of this disease.

This exciting clinical program is now well positioned for the coming year as we drive towards producing data from our placebo-controlled Phase 2 study.

The clinical results that we announced in 2008 were highly encouraging and moved us one step closer to vali-dating PRX302 to potential partners that have shown interest in this novel therapeutic agent. In November 2008, we announced positive top-line data from the Phase 2 open-label BPH study, demonstrating that PRX302 pro-vided significant symptomatic relief while maintaining an excellent safety profile in men suffering with moderate to severe BPH. In this 18-patient single treatment study the primary objective was to determine the optimal dosing volume in order to fully exploit the therapeutic potential of PRX302. Patients who received 1.0 mL or more of PRX302 solution per deposit showed an International Prostate Symptom Score (IPSS) improvement of 11.2 points (p<0.0001) concurrently with a 50% improvement in their Quality of Life scores.

These results are much more profound than that seen with any of the currently approved or experimental oral drugs and comparable to many office based surgical procedures without the side effects or complications usu-ally associated with these other therapies. In October 2008, we were pleased to announce 12-month results from our Phase 1 BPH study demonstrating that PRX302 continued to show durable therapeutic benefit for at least one year following a single treatment.

On the back of these promising data we commenced, in January 2009, a Phase 2 double-blinded placebo-controlled BPH study called TRIUMPH. This trial will evaluate the efficacy of PRX302 versus placebo using the optimal treatment volume established in the open-label Phase 2 study. We anticipate that we will complete enrollment of this multi-centre clinical trial by mid-year and announce results from this important study before year end.

The progress that we made on our BPH clinical development program in 2008 demonstrates our motivation and focus. We are driven by our goal of having a positive outcome on the lives of patients and believe that PRX302 represents a potential life changing treatment for the millions of men that suffer with this disease. Enrolling and executing the TRIUMPH study in a timely fashion is our primary goal for 2009.

Due to the very challenging macro-economic climate, we have made the necessary decision to focus the majority of our resources on our lead clinical program advancing PRX302 for BPH. Accordingly, we have decreased the study size and rate of enrollment for our Phase 2a study evaluating PRX302 for the treatment of localized recurrent prostate cancer following primary radiation therapy. We remain committed to building value from our entire pipeline and will continue to explore creative approaches to advancing our Phase 2 programs for local-ized prostate cancer as well as recurrent glioblastoma multiforme (GBM – an aggressive form of brain cancer) and other cancers with PRX321.

On the corporate front we also made significant progress in 2008. In February we took an important step by graduating to the Toronto Stock Exchange from the Venture Exchange. This move has helped to enhance the visibility of the Company to a wider investment audience. In May of 2008 we secured additional funding to advance our clinical programs by raising $4.8 million in a private placement financing. This was a timely financing for the Company as market conditions deteriorated considerably as the year progressed. We were also very pleased to announce the appointment of Dr. Jack Geltosky to our Board of Directors. Dr. Geltosky brings extensive pharmaceutical industry experience to Protox and we feel that this strategic appointment will be invaluable as we continue to pursue longer term commercial activities and partnerships.

The dedication of our people reflects a belief that our work makes a difference in the lives of people treated by our products. It is this motivation and culture that I continue to be proud of at Protox. It is because of our passion to provide hope and help to the many patients in need that we are driven to perform at a high level each day. Most of all, we never lose sight of the fact that we are in the business of improving healthcare while at the same time creating value for our shareholders. To this end, our semi-virtual operation allows us to access, deploy and manage the best available resources efficiently thereby providing us considerable flexibility in enabling us to preserve cash while making significant progress.

As always, we shall be focused on addressing the needs of our patients, shareholders and employees. We face our new challenges and opportunities with optimism and confidence and look forward to reporting our progress during 2009. On behalf of the board of directors and the entire Protox team, I thank all our loyal shareholders for their trust and commitment. Most of all, we at Protox would like to extend our greatest thanks to the physicians, patients and their families for participating in our clinical trials.

Fahar Merchant, PhD President and CEO

PROTOX THERAPEUTICS INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 MANAGEMENT’S DISCUSSION AND ANALYSIS The following management’s discussion and analysis (“MD&A”) has been prepared as of March 23, 2009 and should be read in conjunction with our audited financial statements for the year ended December 31, 2008 and the Company’s Annual Information Form, dated March 23, 2009 (collectively known as the “Financial Statements”). All the financial information has been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”) and all dollar amounts are expressed in Canadian dollars unless otherwise noted. Additional information relating to Protox Therapeutics Inc., including the Company’s Financial Statements, can be found on SEDAR at Hwww.sedar.comH. FORWARD-LOOKING INFORMATION Certain statements and information in this MD&A contain “forward-looking information” within the meaning of applicable Canadian securities laws. Such forward-looking statements or information include, but are not limited to, statements or information with respect to our intent, belief or current expectations primarily with respect to the regulatory approvals, market and general economic conditions, future costs, expenditures and our future operating performance and financial condition related to the future advancement, success and commercialization of our development programs. Often, these statements include words such as “plans”, “expects”, “estimates”, “forecasts”, “intends”, “anticipates”, “believes” or “continues” or variations of such words and phrases or statements that certain actions, events or results “may”, “could”, “would”, “might” or “will” be taken, occur or be achieved. With respect to forward-looking statements and information included herein, we have made numerous assumptions including among other things, assumptions about our future financing requirements and our ability to meet our obligations, our ability to meet regulatory requirements, the anticipated market for our products and our ability to achieve our goals. Even though our management believes that the assumptions made and the expectations represented by such statements or information are reasonable, there can be no assurance that the forward-looking statement(s) will prove to be accurate. By their nature, forward-looking statements and information are based on assumptions and involve known and unknown risks, uncertainties and other factors, many of which are beyond the Company’s control that may cause our actual results, events or developments to differ materially from those that are expressed or implied by such forward-looking information. Such risks, uncertainties and other factors include, among other things, the following: negative results from our clinical studies; drug product supply for our clinical trials; inability to fund our development programs; unexpected delays in drug discovery, clinical development and manufacturing; program delays due to reliance on third-party service providers; raw material and operating costs; changes in government regulation; fluctuations in demand and supply for our products; industry production levels; general economic and business conditions; our ability to execute our business plan; and those additional risks set forth under the heading "Risk Factors" in our Annual Information Form for our financial year ending December 31, 2008. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements or information prove incorrect, actual results may vary materially from those described herein as intended, planned, anticipated, believed, estimated, expected or continued. Accordingly, readers should not place undue reliance on forward-looking statements or information. We undertake no obligation to reissue or update forward-looking statements or information as a result of new information or events after the date hereof except as may be required by law. All forward-looking statements and information made in this document are qualified by this cautionary statement pursuant to the “safe harbour” provisions of applicable securities legislation.

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 COMPANY OVERVIEW Protox Therapeutics Inc. (the “Company” or “Protox”) is a biopharmaceutical company focused on the research, development and commercialization of novel receptor targeted fusion proteins for the treatment of human diseases. These fusion proteins are designed to specifically deliver potent payloads to targeted tissues or cells to either cause cell death or promote survival without the side-effects normally associated with conventional therapeutics. Protox is advancing a pipeline of receptor targeted fusion proteins based on three complementary technology platforms: PORxin™, INxin™ and HUMxin™. The payloads used to generate our lead compounds are derived from genetically engineered bacterial toxins or fully human Bcl-2 family of proteins. The Company’s lead PORxin candidate, PRX302 is in two separate Phase 2 clinical trials for the treatment of benign prostatic hyperplasia (“BPH”, commonly known as enlarged prostate) as well as localized prostate cancer. The INxin candidate, PRX321, has previously been evaluated in 86 patients with primary brain cancer and other solid tumours. PRX321 has recently received approval from the U.S. Food and Drug Administration (“FDA”) for a Phase 2b (pre-pivotal) clinical trial for the treatment of recurrent glioblastoma multiforme (“GBM”) - the most lethal form of brain cancer. Future studies with PRX321 and the HUMxin platform will be actively pursued only after the Company has identified potential partners or collaborators to fund further development activities. PORxin drugs are inactive pro-toxins that bind to cell surface receptors and are activated by specific proteases produced at elevated levels by target cells. Once activated, the toxin inserts into the cell membrane creating large pores on the cell surface. Leakage of cellular contents and loss of membrane integrity ultimately causes cell death. PRX302, our lead candidate from the PORxin platform, is activated on the surface of prostate cells by the protease, prostate specific antigen (“PSA”), which is over-produced in patients with BPH or prostate cancer. The Company’s Phase 2 clinical trial, evaluating PRX302 as a treatment for BPH, was initiated and completed during the year. Based on the encouraging top-line results from this open-label study, a double-blinded, placebo controlled, multi-centre BPH Phase 2 study was initiated in January 2009 and top-line results are expected before the end of 2009. A Phase 2a clinical trial for the treatment of localized, recurrent prostate cancer with PRX302 was initiated earlier in the year and the results are expected to be reported in 2009. INxin drugs target cancer cells that over-express specific tumour associated receptors on their cell surface. Once bound to the cancer cells, INxin drugs enter the cell and inhibit protein synthesis which ultimately leads to cell death. PRX321, a lead candidate from the INxin platform, has been engineered to target interleukin-4 receptors (“IL-4R”), which are over-expressed on the surface of several types of cancer. Phase 1 and 2a clinical trials in 72 patients have been completed with PRX321 for the treatment of primary brain cancer, specifically recurrent GBM and anaplastic astrocytoma (“AA”). A Phase 1 clinical trial in 14 patients with recurrent and progressive peripheral solid tumours, specifically renal cell carcinoma and non-small cell lung cancer, has also been completed. PRX321 has the potential for the treatment of other peripheral solid tumours and haematological tumours. PRX321 has received both Fast Track Designation and Orphan Drug Designation from the FDA for primary brain tumours. In June 2008, the European Medicines Agency (“EMEA”) granted Orphan Medicinal Product Designation to PRX321 in Europe for the treatment of glioma. The manufacture of a new GMP (Good Manufacturing Practices) compliant batch of PRX321 was also completed during the year, securing sufficient drug product to meet the needs of the PRX321 program for the foreseeable future. The protocol for the Phase 2b GBM study has been approved by the FDA and will commence only after a

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 COMPANY OVERVIEW (continued) suitable partner has been identified to fund further clinical development. This strategy will enable the Company to conserve cash and allocate adequate resources in order to execute on its lead PRX302 BPH clinical program. HUMxin, a next-generation platform technology in-licensed in 2007, is a program being developed in collaboration with the U.S. National Institutes of Health. The objective of this discovery stage program is to develop novel receptor targeted fusion proteins, using the fully human Bcl-2 family of proteins as payloads, in order to accelerate or prevent apoptosis (programmed cell death). The program is in pre-clinical development and future research will be conducted if the Company is successful in securing non-dilutive research grants. The Company continues to work in partnership with co-inventors of the PORxin, INxin and HUMxin platforms as well as experts and key opinion leaders, or KOL, in the field in order to guide the Company in the successful development of our lead candidates as well as strengthen our product pipeline. 2008 HIGHLIGHTS

• Announced positive final results from its PRX302 Phase 1 BPH clinical trial. • Initiated an open label Phase 2a study of PRX302 for the treatment for localized,

recurrent prostate cancer and commenced patient enrolment in the US. • In conjunction with graduation from the TSX Venture Exchange, the Company’s

common shares commenced trading on the Toronto Stock Exchange on February 4, 2008. • Entered into a Collaborative Research and Development Agreement (“CRADA”) with

Dr. Raj Puri of the FDA in order to further develop PRX321and other novel IL-4 receptor targeted therapeutics.

• Initiated an open label Phase 2 clinical trial of PRX302 for the treatment of BPH. With patient enrollment completed one quarter ahead of schedule, encouraging final results were reported in November.

• Entered into a collaborative research agreement with Johns Hopkins University involving further development of novel receptor targeted fusion proteins based on the PORxin platform.

• Preliminary results from the PRX302 Phase 1 BPH clinical study were presented by Principal Investigator Dr. Pommerville at the 2008 Annual Meetings of the American Urological Association (AUA) and Canadian Urological Association (CUA). Dr. Pommerville’s presentation was entitled “A PSA-Activated Protoxin (PRX302) Administered Transperineally to Men with Symptomatic Benign Prostatic Hyperplasia”.

• Closed a brokered private placement of common shares at $0.70 per common share resulting in gross proceeds totaling approximately $4.8 million.

• EMEA granted Orphan Medicinal Product Designation to PRX321 for the treatment of glioma.

• Presentation at the 8th Congress of the European Association of Neuro-Oncology (“EANO”) entitled “Convection enhanced delivery (CED) of IL-4 pseudomonas exotoxin (PRX321): Increased distribution and MR monitoring” by Company collaborator Dr. Yael Mardor who received the EANO 2008 Best Poster Award.

• Completed manufacture of cGMP compliant batch of PRX321 at Dompe Pha.r.ma (“Dompe”) for use in Phase 2b recurrent GBM and other clinical studies.

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 2008 HIGHLIGHTS (continued)

• PRX321 study conducted by Company collaborator Dr. Raj Puri and colleagues in Japan

entitled “Potent in vitro and in vivo antitumor activity of interleukin-4-conjugated Pseudomonas exotoxin against human biliary tract carcinoma” was published in the International Journal of Cancer, Volume 123(12), p. 2915.

• Appointed pharmaceutical industry veteran Dr. Jack Geltosky to the Board of Directors. • Announced additional positive data from the Company’s Phase 1 BPH study

demonstrating that PRX302 provides durable and long-term treatment effects that last for at least 12 months following a single treatment.

• Data from the PRX302 Phase 1 prostate cancer study was presented at the 15th Annual Scientific Retreat of the Prostate Cancer Foundation. The poster presentation was entitled “A Phase 1 Trial of PSA-Activated Pore-Forming Protoxin (PRX302) as Therapy for Locally Recurrent Prostate Cancer”.

SUBSEQUENT HIGHLIGHT

• In January 2009, a multi-centre, double-blinded, placebo controlled Phase 2 study of PRX302 (study name: TRIUMPH) was initiated in subjects with moderate to severe BPH. Study results from TRIUMPH are expected before the end of 2009.

RESEARCH & DEVELOPMENT UPDATE PORxin Platform Benign Prostatic Hyperplasia Phase 1 Clinical Trial Final BPH Phase 1 study results were announced in January 2008 indicating that PRX302 was safe and well tolerated and showed promising signs of therapeutic activity for the treatment of BPH. This study was an open-label, multi-centre, dose escalation study where the primary endpoint was safety and tolerability following a single intra-prostatic administration of PRX302. The secondary endpoint was to determine therapeutic activity as measured by the change in International Prostate Symptom Score (“IPSS”) throughout the study, when compared to screening. In addition, changes in Quality of Life (“QoL”) scores, prostate volume and urinary flow parameters were also monitored. Using a well-established, image-guided technique, PRX302 was administered directly into the prostate in a relatively simple procedure performed in the urologist’s office. A total of 15 patients with moderate to severe BPH were treated in this trial at two sites in Canada. The dose was escalated 14-fold from cohort 1 to cohort 4, keeping the dosing volume constant, whereas one additional cohort received approximately 6-fold higher volume at the lowest dose. Most patients treated in this study were either refractory or intolerant to oral therapy. Despite a 14-fold escalation in dose, no safety issues were identified and maximum tolerated dose (“MTD”) was not reached in this study. Results indicate that PRX302 was well tolerated with no serious adverse events observed. Treatment related adverse events were generally reported as being mild or moderate, local and transient in nature.

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 RESEARCH & DEVELOPMENT UPDATE (continued) Treatment related symptomatic relief was rapid and substantial benefits were noticed by day 30 post treatment. Both symptom scores (IPSS and QoL) continued to show further improvements in all cohorts at the end of the active study period (day 90 post treatment) indicating a potential for sustained benefit following a single treatment with PRX302. Across all treatment groups, IPSS scores showed a statistically significant improvement from screening to day 30 (p < 0.01) and continued to day 90 post-treatment (p < 0.001). The mean IPSS values improved by an average of 4.8 points, or 25%, from 19.1 ± 4.3 at screening to 14.3 ± 5.7 at day 30 post treatment. By day 90, IPSS improved by an average of 8.5 points or 45% (10.6 ± 5.9). Improvement in QoL scores were observed in all 5 cohorts. Independent of the treatment group, QoL scores improved from an average of 4.3 ± 1.1 at screening to 2.5 ± 1.6 by day 30 (p < 0.01) and continued to show a 50% improvement by day 90 (QoL = 2.1 ± 1.6; p < 0.01). Furthermore, prostate volume decreased in all cohorts. Irrespective of cohort assignment, the mean prostate volume decreased by over 26% at day 90 post-treatment (p < 0.05). On October 8, 2008, the Company announced that the improvement in symptom scores observed at 6 and 9 months (as reported on April 16, 2008) continued to be sustained at 12 months following a single treatment of PRX302. More specifically, for the 14 patients (of the total 15 patients) continued to be followed at 12 months post treatment, the mean IPSS showed statistically significant improvement (p < 0.01) of an average of 6.5 points from 19.2 ± 4.5 at screening to 12.7 ± 4.6 at 12 months post treatment. These improvements were observed across all seven symptom sub-scores. Improvement in QoL scores were observed in all five cohorts. Independent of the treatment group, QoL scores continue to show a statistically significant improvement from an average of 4.6 ± 1.0 at screening to 2.6 ± 1.6 at 12 months (p < 0.01), a 44% improvement. Furthermore, prostate volume decreased in all cohorts. Irrespective of cohort assignment, the mean prostate volume decreased by over 13%, 12 months post-treatment compared to initial screening. Phase 2 Clinical Trial Based on encouraging data from the Phase 1 study, the Company initiated an open label BPH Phase 2 clinical trial during 2008 Q2. The objective of this study was to optimize dosing volume in order to improve local distribution and further enhance therapeutic activity of PRX302 following a single intraprostatic injection, as well as to evaluate safety and tolerability. Enrolment was completed during mid-2008 Q3 and final study results were announced in November 2008 indicating that PRX302 provided significant symptomatic relief while maintaining an excellent safety and tolerability profile in men with moderate to severe BPH. This study was a single-arm, open-label, multi-centre, Phase 2 study in which increasing volumes of PRX302, at a fixed concentration (3 µg/mL), were administered into the prostates of men with moderate to severe BPH. Three cohorts of 6 subjects each received PRX302 at volumes equivalent to 10%, 20% and 30% of prostate volume. The intended volume for each subject was administered through a single injection in 3 equal deposits into each lobe of the prostate under ultrasound guidance. Therapeutic activity was measured by the change in standardized symptom indices, namely IPSS and QoL, when compared to scores at screening. In addition, changes in prostate volume were also monitored. A total of 18 patients who were refractory, intolerant or unwilling to use alpha-blockers were treated in this study.

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 RESEARCH & DEVELOPMENT UPDATE (continued) The mean pre-treatment IPSS of subjects in this study was 20.2. IPSS results at 90 days post treatment demonstrated symptomatic relief in all cohorts with an average improvement in IPSS of 2.8 points in Cohort 1 (15.6%), 10.9 points in Cohort 2 (54.0%) and 10.3 points in Cohort 3 (46.2%). IPSS data appear to indicate a dose response with Cohort 1 showing both a smaller point and a smaller percentage improvement than Cohorts 2 and 3 at the 90 day time point. Furthermore, this dose response is more evident when subjects are stratified by the volume of PRX302 administered per deposit. Subjects who received 1.0mL or greater per deposit (n=13) showed a statistically significant IPSS improvement of 11.2 points (p<0.0001) at day 90 post treatment. These results are encouraging and are approximately double that reported for currently approved BPH drugs and comparable to many of the successful surgical results that are published. Compared to an average of 4.5 score at screening, QoL scores improved by an average of 1.5 points (35%) in Cohort 1, 1.7 points (43%) in Cohort 2 and 3.0 points (57.7%) in Cohort 3 at day 90 post treatment. Again, when stratified by volume of PRX302 administered per deposit, the same dose response seen with IPSS was observed with QoL scores. Subjects who received 1.0 mL or greater per deposit (n=13) showed a statistically significant QoL improvement of 2.5 points (p<0.0001) at day 90 post treatment.

Prostate measurements were conducted by ultrasound at screening and post treatment and showed a significant decrease in prostate volume in the majority of subjects treated.

No safety issues were identified in this study and increasing volumes of PRX302 were seen to be well tolerated. The MTD was not reached and no serious adverse events or Grade 3 or greater adverse events have been reported to date. The adverse events reported were mild to moderate, very transient in nature (resolved within days) and localized to the urinary tract. In addition, no sexual dysfunction and no clinically abnormal laboratory findings have been reported in any of the subjects dosed to date. Phase 2 Placebo Controlled Clinical Trial On January 12, 2009, the Company announced the initiation of a multi-centre, double-blinded placebo controlled Phase 2 study of PRX302 (study name: TRIUMPH) in subjects with moderate to severe BPH. The trial will evaluate the efficacy of PRX302 versus placebo using the optimal treatment volume established in the open-label Phase 2 study recently completed. The clinical trial’s primary endpoint will be to determine efficacy of PRX302 as demonstrated by a statistically significant change in IPSS from baseline when compared to placebo. Secondary endpoints will be the measurement in change from baseline of the QoL score, Peak Urinary Flow Rate (“Qmax”) and Post-Voiding Residual urine volume (“PVR”) when compared to placebo. The trial will also continue to assess safety and tolerability of PRX302. Patients will be randomized 2:1 (treatment:placebo) and each patient will either receive PRX302 (3µg/ml) or placebo at a volume equivalent to 20 percent of the total prostate volume. Dosing for each arm will be delivered via a single ultrasound-guided injection into each lobe of the prostate. Study results from TRIUMPH are expected before the end of 2009.

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 RESEARCH & DEVELOPMENT UPDATE (continued) Prostate Cancer Phase 1 Clinical Trial Final data for this multi-center, open-label, dose-escalation Phase 1 clinical trial was released in November 2007 indicating that PRX302 was well tolerated and showed encouraging early signs of therapeutic activity following a single intra-prostatic administration. A total of 24 patients were treated in this study at five trial sites in the U.S. The objective of the study was to determine the safety and tolerability of PRX302 as a primary endpoint and therapeutic activity as a secondary endpoint in patients with biopsy proven localized recurrent prostate cancer following radiation therapy that showed signs of disease progression as evidenced by rising levels of PSA. No significant safety issues relating to PRX302 treatment were encountered in this clinical trial. One patient in the study, who met inclusion criteria in spite of having borderline liver abnormalities, showed a transient rise in liver enzymes (Grade 3 on the National Cancer Institute’s 5-stage grading scale) that quickly returned to screening levels. An expanded cohort was enrolled at this dose in order to collect additional safety data. No safety issues were observed in any patients within the expanded cohort or in further cohorts that received higher doses. In summary, no serious adverse events were reported relating to PRX302 and all other adverse events reported were mostly associated with the injection procedure, rating no higher than Grade 1 (mild). Assessment of potential therapeutic activity was determined by measuring PSA levels throughout the study and conducting prostate biopsies at 30 days post-treatment. A comparison of prostate biopsies taken at baseline and day-30 post-treatment showed that 18 of the 24 patients had a decrease in the percentage of cancer-positive biopsies. Three patients showed no detectable adenocarcinoma in their day-30 biopsy. Results showed that in 21 of the 24 patients a decrease in PSA levels below screening levels was observed at 30 days or longer post treatment while in 15 of 24 patients PSA levels continued to be below screening levels or stable at 90 days or longer. Comparison of PSA levels pre- and post-treatment showed a desirable trend towards an increase in PSA doubling time (“PSADT”) in 19 of 24 patients and a decrease or stable PSA velocity (“PSAV”) in 17 of 24 patients, both of which are positive outcomes for the patient. Protox has concluded that, despite a 100-fold escalation in dose, MTD was not reached in this study while evidence of therapeutic activity was observed. Phase 2a Clinical Trial Following the positive Phase 1 study results, the Company announced on January 15, 2008 that IRB approvals had been received to proceed with a Phase 2a study of PRX302 for the treatment of patients with locally recurrent prostate cancer following primary radiation therapy. The objective of this study is to optimize dosing volume and injection regimen in order to improve local distribution and further enhance therapeutic activity of PRX302. The assessment of therapeutic activity will be based on the level of decrease in both PSA levels and tumour burden and increase in PSADT following treatment. In addition, the study will also evaluate the safety and tolerability of different dosing volumes and injection regimens. The results from this study are expected to be available in 2009.

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 RESEARCH & DEVELOPMENT UPDATE (continued) INxin Platform Primary Brain Cancer Prior to the in-licensing of PRX321 from the U.S. Public Health Service (“PHS”) and the acquisition of related program assets from Neurocrine Biosciences Inc. (“Neurocrine”) in July 2006, a total of 72 patients with glioma (66 patients with GBM and 6 patients with AA) had been treated with PRX321 in Phase 1 and Phase 2 clinical trials in the U.S. and Europe. In these trials, all patients had recurrent and progressive forms of glioma and PRX321 was infused into the brain using a technique called Convection Enhanced Delivery (“CED”). The results showed that PRX321 was well tolerated with minimal systemic toxicity. In these clinical trials, over 70% of non-resected patients had complete or partial necrosis (shrinkage) of their tumours after a single treatment. In recurrent GBM patients with resectable tumours at first relapse, median survival was 11.6 months compared to a median survival of approximately 6 months normally expected in this patient population. As noted above, PRX321 has received Orphan Drug Designation from the FDA for treatment of astrocytic glioma and Fast Track Designation for treatment of recurrent GBM. Fast Track Designation enables expedited review by the FDA of products that are in clinical development and Orphan Drug Designation provides a number of benefits including seven years of market exclusivity subsequent to marketing approval. In January 2008, an application was submitted to EMEA to obtain Orphan Medicinal Product Designation in Europe, which would afford ten years of market exclusivity following marketing approval. Following a positive opinion from its Committee for Orphan Medicinal Products, in June 2008 EMEA granted Orphan Medicinal Product Designation to PRX321 for the treatment of glioma. During 2007 Protox entered into a collaborative research and clinical development agreement with BrainLAB AG (“BrainLAB”) of Germany for use of their proprietary drug delivery software, iPlan® Flow. The purpose of the software is to allow neurosurgeons to better plan treatments and catheter placement for optimal delivery and distribution of PRX321. Additional research in collaboration with Dr. Yael Mardor (Sheba Medical Centre), Dr. Zvi Ram (Tel Aviv Medical Centre) and Dr. John Sampson (Duke University), to further optimize the delivery and distribution of PRX321 was completed in 2008. Some of the results from these studies were presented at the 8th Congress of the European Association of Neuro-Oncology (EANO) held in Barcelona during September 2008. The Company also entered into an agreement with Dompé pha.r.ma S.P.A. (“Dompé”) of Italy in July 2007 to manufacture GMP batches of PRX321 drug substance. CMC related technology transfer and process scale-up activities were conducted in 2007 in preparation for manufacture of GMP compliant batches of PRX321 in 2008. GMP production of PRX321 bulk drug substance at Dompe, as well as GMP manufacture of vialed PRX321 drug product at AAI Pharma Inc. (North Carolina, USA), were completed by the end of 2008 Q3 as anticipated. Accordingly, the Company has ready and sufficient drug product to meet its PRX321 program needs for the foreseeable future.

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 RESEARCH & DEVELOPMENT UPDATE (continued) Based on the encouraging Phase 1 and 2a results, the Company had anticipated initiating a multi-centre Phase 2b (pre-pivotal) clinical trial in patients with recurrent GBM in 2009 Q1. Accordingly, the Company undertook the prerequisite CMC (chemistry, manufacturing and controls), drug delivery, regulatory and clinical planning and related preparatory activities. An open-label Phase 2b clinical study protocol for the treatment of patients with GBM at first recurrence (study name: CLARITY) was developed in conjunction with PRX321 investigators and experts on CED and imaging technologies. The protocol along with updated CMC information was submitted to the FDA. The Company has received the necessary approval from the FDA enabling it to proceed with the clinical trial. However, given the current unprecedented economic turmoil, Management has decided to squarely focus its resources on the development of its lead program, PRX302, for the treatment of BPH. Accordingly, enrolment in the CLARITY study for recurrent GBM will not be initiated until additional financing or a strategic partner is secured. Peripheral Non-Central Nervous System (Non-CNS) Cancers In addition to the Phase 1 and Phase 2a primary brain cancer studies described above, Neurocrine also previously completed a Phase 1 safety study in patients with recurrent or unresponsive solid peripheral tumours that express the IL-4 receptor. Fourteen patients with either renal cell carcinoma (“RCC”) or non-small cell lung cancer (“NSCLC”) received three escalating doses of intravenously (“IV”) administered PRX321 and MTD was established. Eight of the 12 evaluable patients with RCC had stable disease. To date cancer tissue samples from over 400 patients have been analysed for IL-4R expression. Furthermore, based on in vitro and in vivo studies, at least a dozen different cancers have been shown to be suitable targets for PRX321. The Company may pursue fully funded or Investigator initiated Phase 1/2 studies depending on interest from various institutions and potential collaborators in order to treat cancers known to over-express IL-4R. In 2007, Dr. Raj Puri, MD, PhD, Director, Division of Cellular and Gene Therapies, Center for Biologics Evaluation and Research at the FDA and co-inventor of PRX321, in collaboration with scientists at the National Cancer Institute, published new findings for PRX321 in the journal, Cancer Research (Volume 67(20), p. 9903-9912), showing that PRX321, when combined with gemcitabine, a chemotherapeutic agent currently used to treat advanced pancreatic cancer, was shown to have a synergistic anti-tumour effect both in vitro and in a clinically relevant mouse model of advanced pancreatic cancer. Specifically, those mice treated with a combination of PRX321 and gemcitabine showed a significant decrease in tumour burden and improved survival compared to treatment with either PRX321 or gemcitabine alone. The results showed that the combination approach was able to completely eradicate tumours in 40% of mice with established tumours and significantly prolonged survival of mice bearing advanced distant metastatic tumours. This study demonstrates for the first time the potential of combining PRX321 with a chemotherapeutic agent for treating patients with pancreatic cancer. In 2008, FDA collaborator Dr. Raj Puri together with his colleagues in Japan published new data for PRX321 in the International Journal of Cancer (Volume 123(12), p. 2915). In this study, PRX321 was shown to specifically target IL-4R over expressed on biliary tract carcinoma (“BTC”) cells. PRX321 was also shown to have potent antitumor activity both in vitro and in a mouse model of human BTC. BTC is an aggressive and frequently lethal disease with a high clinical unmet need. These results indicate that PRX321 is a potent agent and may provide a new therapeutic option for the treatment of BTC.

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 RESEARCH & DEVELOPMENT UPDATE (continued) Collaborative Research As announced on April 30, 2008, the Company has entered into a collaboration with the FDA under the terms of a CRADA (“FDA CRADA”). The collaborative research and development program will be conducted by the principal investigators Dr. Sam Denmeade, MD, Chief Scientific Officer of Protox and Dr. Raj Puri. PRX321 co-inventor Dr. Puri is a pioneer in the research of IL-4R as a potential drug target in cancer and has published extensively in this area. The collaboration will focus on characterizing IL-4R on various human tumours, determining the mechanism of up regulation of these receptors, developing assays and animal models to evaluate the safety and efficacy of IL-4R-directed therapeutic agents, such as PRX321, and using laboratory analyses to assess the clinical potential of PRX321, either as a monotherapy or in combination with other therapeutic agents. In addition, novel compounds targeting IL-4R will be engineered and tested. Over and above supporting our anticipated recurrent GBM Phase 2b (pre-pivotal) clinical trial, this collaboration will serve to demonstrate the full potential of PRX321 as a selective and potent therapeutic targeting a large number of tumours that over express IL-4R. HUMxin Platform The HUMxin technology is based on novel fusion proteins that contain a targeting component for binding to receptors on specific human cell populations linked to a second component comprising a member of the fully human Bcl-2 family of proteins. The Bcl-2 family includes both pro-apoptotic and anti-apoptotic members. Pro-apoptotic proteins have been shown to induce tumor cell death whereas anti-apoptotic proteins can inhibit cell death. Due to its central role in the regulation of apoptotic cell death, the Bcl-2 pathway has attracted a considerable amount of interest from pharmaceutical companies. The HUMxin technology represents an opportunity to potentially develop targeted therapeutics for the treatment of various diseases, including different types of cancers as well as, the protection and/or regeneration of cells, tissues or organs. The HUMxin technology provides the following key advantages: targeting a well-established pathway regulating apoptosis; novel fully-human fusion proteins covered by strong intellectual property; it is not expected to elicit an immune response, enabling repeated dosing; potential for product line-extension by developing next-generation targeted products; potential to treat multiple indications; potential for combination therapy; as well as simple and cost-effective manufacturing. Effective January 2008, the Company extended its Cooperative Research and Development Agreement (“CRADA”) with the U.S. National Institute of Neurological Disorders and Stroke (“NINDS”) by two years to conduct research related to the HUMxin platform technology. Under the terms of the CRADA, the Company provides research funding to NINDS in exchange for an exclusive option to license inventions developed under the executed CRADA research plan. Further bolstering the Company’s HUMxin program, the Company entered into a license agreement with PHS during the year for an exclusive license to patents that cover fully human anti-apoptotic fusion proteins comprising GM-CSF and Bcl-xL.

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 RESEARCH & DEVELOPMENT UPDATE (continued) During 2008 Q4, the Company entered into a research agreement with the University of Alabama at Birmingham to conduct HUMxin research under the direction of Dr. Candace Floyd (“Floyd Agreement”). Under the Floyd Agreement, the Company provides funding in exchange for an exclusive option to license certain future inventions not related to the Company’s intellectual property developed under the research plan. Any future inventions developed based on the Company’s intellectual property are solely owned by the Company. INTELLECTUAL PROPERTY

Patent and other proprietary technology rights are a foundation block upon which we continue to build a successful biopharmaceutical development company and, therefore, we file and prosecute patent applications to protect our proprietary discoveries. As with the patent positions of other pharmaceutical, biopharmaceutical and biotechnology firms, we do not know whether any patent applications will result in the issuance of patents or, for patents that are issued, whether they will provide significant proprietary protection or will be circumvented or invalidated.

Patents and patent applications covering the PORxin technology licensed or owned by the Company are currently being prosecuted under the following five patent families:

i) Proaerolysin Containing Protease Activation Sequences and Methods of Use for Treatment of Prostate Cancer;

ii) Method of Treating or Preventing Benign Prostatic Hyperplasia Using Modified Pore-Forming Proteins;

iii) Modified Pore-Forming Protein Toxins and Use Thereof; iv) Modified Protein Toxins and Use Thereof for Treating Disease; and v) Method and Composition for Treating Prostatitis

Four issued patents in various territories, including the U.S., cover composition of matter and method of use for the PRX302 drug candidate and the PORxin technology. Several other patent applications are pending internationally.

The INxin technology licensed by the Company is covered by issued patents and patent applications under the following six patent families:

i) Fusion Proteins Comprising Circularly Permuted Ligands; ii) Circularly Permuted Ligands and Circularly Permuted Chimeric Molecules; iii) Convection-Enhanced Drug Delivery; iv) Method for Convection-Enhanced Delivery of Therapeutic Agents; v) Targeted Cargo Protein Combination Therapy; and vi) Treating Cancer Stem Cells Using Targeted Cargo Proteins

Seven issued patents in the U.S., Europe, Canada and Australia cover the composition of matter and method of use of the PRX321 drug candidate and the INxin technology. Several other patent applications have been filed by the Company and are pending. As PRX321 has been granted Orphan Drug Status by the FDA and EMEA, the market exclusivity of PRX321 will be extended by seven and ten years, respectively, if the drug candidate is successfully approved. Under the

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 INTELLECTUAL PROPERTY (continued) terms of the FDA CRADA, Protox has an exclusive option to license any future inventions developed under this INxin research program.

The HUMxin technology licensed by the Company is covered by worldwide patent applications under the following patent family:

i) Methods and compositions for Inhibiting Cell Death or Enhancing Cell Proliferation

Relating to the HUMxin technology and intellectual property being developed under the NINDS CRADA, Protox has an exclusive option to license any future inventions developed under this HUMxin research program. We also rely upon trade secrets, know-how and continuing technological innovations to develop and maintain our competitive position. It is our policy to require our employees, consultants, and parties to collaborative agreements to execute confidentiality agreements upon the commencement of employment, consulting relationships or a collaboration with us. These agreements provide that all confidential information developed or made known during the course of these relationships are to be kept confidential. In the case of all our scientific staff, agreements are in place providing that all inventions resulting from work performed for us utilizing our property or relating to our business and conceived or completed by the individual during employment are our exclusive property to the extent permitted by law.

SELECTED ANNUAL INFORMATION Year ended December 31 2008

(audited) 2007

(audited) 2006

(audited) Net and comprehensive loss $ (8,919,060) $ (7,446,052) $ (5,012,646) Basic and diluted loss per share (0.12) (0.13) (0.13) Total assets 8,458,104 12,913,664 11,514,697

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 RESULTS OF OPERATIONS Overview The Company has not earned any revenue in any of its previous fiscal years, other than income from interest earned on the Company's cash balances. The net and comprehensive loss reported for the year ended December 31, 2008 (“2008 FY”) totaled $8.9 million or $0.12 per share compared to $7.4 million or $0.13 per share for the year ended December 31, 2007 (“2007 FY”). Research and Development Costs Research and development (“R&D”) costs for the 2008 FY period totaled $6.2 million representing a $1.3 million (27%) increase from $4.9 million incurred during the 2007 FY comparative period. The increase reflects the continuing effect of the expanded scope and advancement of Protox’s drug development and clinical trial activities. Since the beginning of the year, incremental costs have been incurred compared to 2007 FY for: i) clinical and regulatory preparatory activities and PRX321 CMC activities / drug supply manufacturing for the anticipated GBM Phase 2b study and ii) running two new PRX302 Phase 2 clinical trials for BPH and prostate cancer. During 2007, the scope and related cost of PRX321 CMC / drug supply manufacturing activities were significantly less as GBM Phase 2b clinical trial planning activities were nominal compared to 2008. In addition, the cost of the PRX302 Phase 2 BPH study undertaken and completed during 2008 FY was more expensive than the predecessor Phase 1 study initiated and completed during 2007 FY. A milestone payment relating to the PRX302 prostate cancer program also contributed to increased R&D costs earlier in 2008. Discovery research costs for 2008 FY were $0.76 million increased roughly 50% from $0.5 million for 2007 FY. The 2008 FY increase reflects incremental spending associated with the CRADA and collaborative research activities discussed in the Research & Development Update section. General and Administrative Costs 2008 FY general and administrative (“G&A”) costs of $2.3 million increased 14% from $2.0 million for the 2007 FY comparative period. Nearly half of the increase is attributable to a one-time listing fee of $0.1 million and related costs associated with the Company’s graduation from the TSX Venture Exchange to the Toronto Stock Exchange early in 2008 Q1. The 2008 FY increase also reflects an increase in business development personnel and activities and is commensurate with the growth of the Company and its operations. G&A costs will generally vary from period to period depending on the specific business development, market research and shareholder relations initiatives undertaken and related travel required at such time to support the Company’s corporate objectives.

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 RESULTS OF OPERATIONS (continued) Interest Income During 2008 FY, the Company earned interest income of $0.29 million compared to $0.35 million for the corresponding 2007 FY comparative period. Interest income earned during a particular period or between periods is a function of investment products, interest rate and / or investment yields available when funds become available for reinvestment as well as average cash balances invested. Consequently, interest income and investment returns have varied throughout the year and, on a comparative basis, are anticipated to continue to vary given the current and expected near term market environment. Foreign Exchange Loss Up to the final quarter of 2008, the Company had recorded nominal foreign exchange losses for fiscal 2008 as the relative value of the Canadian dollar had marginally changed against the U.S. dollar and Euro. The combined effect of a 13% and 14% decline in the Canadian dollar against the U.S. dollar and Euro, respectively, contributed to losses of $0.15 million during 2008 Q4 primarily on foreign currency denominated trade payables and accruals. An approximate 15% relative decline in the value of the U.S. dollar during the first three quarters of 2007 greatly influenced $0.33 million of losses recorded for the 2007 FY comparative period. With prior U.S. dollar reserves utilized during 2008 FY, the prior unrealized losses from 2007 were realized during this year in the normal course of paying ongoing U.S dollar denominated expenses. The foreign exchange loss or gain recorded for a particular period and difference between comparative periods is a function of prevailing foreign exchange rates in effect at such time compared to the comparative period(s) as well as the amount of net financial assets or liabilities held or transacted during the subject periods. 2008 Q4 Results of Operations For the three months ended December 31, 2008 (“2008 Q4”), the Company incurred a net and comprehensive loss of $2.5 million or $0.03 per share compared to $2.3 million or $0.03 per share for the three months ended December 31, 2007 comparative period (“2007 Q4”). The 8% net increase was largely driven by foreign exchange losses. R&D costs of $1.6 million incurred during 2008 Q4 declined 6% from $1.7 million for the 2007 Q4. Quarter to quarter R&D costs will routinely vary due to both the variable nature and timing of activities for all active and planned clinical trials at any given time. 2008 Q4 G&A costs of $0.73 million increased 16% from $0.63 million in 2007 Q4. In an effort to bolster potential exercise success of warrants (that were expiring December 2008) amidst unprecedented capital markets turmoil, additional investor relations initiatives were undertaken during the quarter. These activities as well as the cost of senior business development personnel hired during 2008 accounted for the relative increase in G&A costs. During 2008 Q4, the Company earned interest income of $0.06 million compared to $0.10 million for 2007 Q4. The decline was the combined effect of the decreased available investment grade instrument yields as well as a lower average balance of funds to invest than in 2007. During 2008 Q4, the Company recorded foreign exchange losses of $0.15 million compared to nominal losses for 2007 Q4. The increase is attributable to an approximate 20% decline in the Canadian dollar against the U.S. dollar from 2007 Q4 to 2008 Q4.

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 �BSUMMARY OF QUARTERLY RESULTS

Unaudited quarterly results prepared by management for the eight quarters to December 31, 2008: (unaudited)

2008 Q4

2008 Q3

2008 Q2

2008 Q1

Interest income $ 63,891 $ 90,934 $ 50,237 $ 87,908 Total expenses 2,555,604 2,587,066 1,936,917 2,132,443 Net and comprehensive loss (2,491,713) (2,496,132) (1,886,680) (2,044,535) Basic and diluted loss per share (0.03) (0.03) (0.03) (0.03) (unaudited)

2007 Q4

2007 Q3

2007 Q2

2007 Q1

Interest income $ 99,134 $ 63,692 $ 95,995 $ 93,039 Total expenses 2,411,616 1,773,141 1,913,014 1,700,141 Net and comprehensive loss (2,312,482) (1,709,449) (1,817,019) (1,607,102) Basic and diluted loss per share (0.04) (0.03) (0.03) (0.03)

The Company does not anticipate earning any revenue in the foreseeable future, other than interest revenue earned on its cash balances. Expenses, in particular R&D costs, are influenced by a number of factors including the scope of clinical development and research programs pursued; the stage (i.e. Phase 1, 2 or 3) of clinical trials undertaken; the number of clinical trials that are active during a particular period of time; the rate of patient enrollment; and ultimately are a function of decisions made to continue the development and testing of a product candidate based on supporting safety and efficacy from clinical trial results. Consequently, expenses may vary from period to period. G&A expenses will be dependent on the personnel and infrastructure required to support the corporate, clinical and business development objectives and initiatives of the Company. Total expenses during both 2008 Q3 and 2007 Q4 were higher than the other quarters presented above primarily due to incremental PRX321 CMC costs. More specifically, during 2007 Q4 initial costs for the manufacture of a new GMP batch of PRX321 product and the associated technology transfer activities ($0.6 million impact) were incurred and costs associated with the completion of PRX321 manufacturing ($0.5M impact) were incurred during 2008 Q3.

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 CONTRACTUAL OBLIGATIONS The Company has entered into long-term contractual arrangements for its facilities. While advancing its clinical development programs, the Company has also entered into a number of contracts in the normal course of business that will remain in effect over several periods. These commitments are performance based with payment subject to the achievement of clinical trial milestones and generally may be cancelled with written notice. The following table presents contractual obligations and estimated purchase obligations arising from these arrangements currently in force at December 31, 2008.

Contractual Obligations Less than 1 - 3 4 - 5 After(in thousands) Total 1 year years years 5 yearsOperating Leases 358$ 168$ 191$ -$ -$ Capital Leases 9 5 4 - - Purchase Obligations 2,965 2,263 581 122 - License Agreements 388 41 77 77 192

Total Contractual Obligations 3,720 2,477 852 199 192

Payments Due by Period

In addition to the above contractual obligations, the Company has commitments as follows: PORxin License Agreement for Prostate Cancer

Pursuant to an exclusive license agreement with John Hopkins University and the University of Victoria, the Company has agreed to make cumulative milestone payments of up to $2.9 million contingent upon the achievement of certain clinical and regulatory milestones and to pay low single digit royalties on commercial sales of resulting products. During 2008, the first milestone payment of $0.08 million became due and was paid. INxin Technology License Agreement

Pursuant to an exclusive license agreement with the U.S. Public Health Service (“PHS”), the Company has agreed to make cumulative milestone payments of up to US$4.0 million contingent upon the achievement of certain clinical and regulatory milestones (for at least three indications) and to pay low single digit royalties on commercial sales of resulting products. Minimum annual royalty payments shall be credited against any earned royalties as they become due and payable in that calendar year. HUMxin Technology License Agreement

Pursuant to an exclusive license agreement with PHS, the Company has agreed to make cumulative milestone payments of up to US$4.8 million contingent upon the achievement of certain clinical and regulatory milestones (for at least three indications) and to pay low single digit royalties on commercial sales of resulting products. Minimum annual royalty payments shall be credited against any earned royalties as they become due and payable in that calendar year.

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 LIQUIDITY AND CAPITAL RESOURCES Since inception, the Company has devoted its resources to funding R&D programs, including discovery research, preclinical studies and clinical trial activities which has resulted in an accumulated deficit of $30 million as of December 31, 2008. With current revenues only consisting of interest earned on cash balances, losses are expected to continue in the near term while the Company’s R&D programs are advanced further. At December 31, 2008, the Company had cash and cash equivalents of $7.3 million, representing a net decrease of $4.1 million from December 31, 2007. The Company had working capital of $6.2 million at December 31, 2008, a decrease of $3.7 million from December 31, 2007. The Company consumed cash of $8.6 million during 2008 FY, an increase of $2.1 million from $6.5 million for 2007 FY. These expenditures principally related to funding continuing operations, license agreement and collaborative research commitment payments of the Company and can be examined in more detail in the 2008 FY financial statements. The Company’s average monthly cash burn during 2008 FY was $0.72 million compared to $0.54 million during the 2007 FY comparative period. The 32% increase in cash burn is largely attributable to the expansion of the Company’s R&D programs and activities as discussed above under “Results of Operations”. In addition, a $0.4 million net reduction in accounts payable and accrued liabilities over the course of the year compared to 2007 FY utilized cash resources. During May 2008, the Company closed a brokered private placement raising $4.8 million from the issuance of 6.9 million common shares. Gross proceeds included approximately $1.8 million from the exercise of an over-allotment option by the agent. The additional cash resources from the successful private placement enabled the Company to accelerate targeted clinical programs and development activities. With the recent turbulent and unprecedented financial and capital markets, all companies are facing the uncertainty of when these markets will improve and the future availability of capital, particularly for micro cap and small cap companies. Due to the impact of global economic and market conditions on our share price late in 2008, the Company did not realize any of the $7.1 million potential warrant exercise proceeds as none of the close to 11.0 million 2006 financing round warrants remaining outstanding were exercised prior to expiry on December 22, 2008. Consequently as a proactive action, we undertook a comprehensive review of current development and discovery programs, operations and anticipated expenditures with the view to reduce or defer costs where possible to maximize available funds for priority initiatives. Management believes that current cash resources should enable the Company to execute its core business plan / priority initiatives and meet its projected cash requirements up to the end of 2009. However, the Company's working capital may not be sufficient to meet its stated business objectives in the event of unforeseen circumstances or a change in the strategic direction of the Company. When, or if, the Company requires additional capital, there can be no assurance that the Company will be able to obtain further financing on favourable terms, if at all. As required, the Company will continue to finance its operations through the sale of equity or pursue non-dilutive funding sources available to the Company in the future. Proceeds of up to $0.4 million from the exercise of the approximate 0.6 million 2008 financing round warrants currently outstanding - exercisable at $0.71 - to purchase common shares could be received hereafter up to May 23, 2010. However, the current share price is significantly below the exercise

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 LIQUIDITY AND CAPITAL RESOURCES (continued) price. During 2007 FY, 98.5% of the 11.8 million November 2005 financing round issued warrants were exercised resulting in proceeds of $7.6 million. The exercise of any outstanding stock options could also provide additional cash resources. Additional funding could also be provided from collaborative arrangements established in the future with pharmaceutical or biotechnology companies in relation to products and technologies under development by the Company. TRANSACTIONS WITH RELATED PARTIES During 2008 FY, certain directors and a former officer, who remains a significant shareholder, provided business advisory and scientific consulting services to the Company pursuant to consulting and other agreements. The Company incurred related expenses of $131,670 for 2008 FY (2007 FY - $244,484) under such agreements. These transactions were incurred in the normal course of business and recorded at their exchange amounts. As of October 2008, the consulting contracts for two directors have been replaced with remuneration now being provided under the Company’s standard independent director compensation program resulting in a significant reduction in the amount recorded as related party transactions for 2008 Q4 and onward. At December 31, 2008, $2,310 was owed for scientific consulting services provided and included in accounts payable (2007 - $nil). CHANGES IN ACCOUNTING POLICIES Capital Disclosures

On January 1, 2008, the Company prospectively adopted the Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 1535 Capital Disclosures (“Section 1535”). This new accounting standard establishes the requirements for disclosing information about an entity’s capital and how it is managed. Section 1535 requires the disclosure of: i) an entity’s objectives, policies and processes for managing capital; ii) quantitative data about what the entity regards as capital; iii) whether the entity has complied with any capital requirements; and if it has not complied, the consequences of such non-compliance. With Section 1535 relating to disclosure and presentation only, its adoption did not have an impact on our financial results. Financial Instruments – Disclosure and Presentation On January 1, 2008, the Company prospectively adopted CICA Handbook Section 3862 Financial Instruments – Disclosure (“Section 3862”) and CICA Handbooks Section 3863 Financial Instruments – Presentation (“Section 3863”). These sections provide enhanced and expanded disclosure requirements to complement the changes in accounting policy adopted on January 1, 2007 in accordance with Section 3855 Financial Instruments – Recognition and Measurement. As Sections 3862 and 3863 relate to disclosure and presentation only, their adoption did not have an impact on our financial results.

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 CRITICAL ACCOUNTING POLICIES AND ESTIMATES Use of estimates

The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could significantly differ from those estimates, including those estimates relating to long-lived and intangible assets; warrants; stock options and stock-based compensation. Intangible assets

Intangible assets include proprietary rights, intellectual property, patent rights and technology rights which have been acquired from third parties. Intangible assets are recorded at cost less accumulated amortization. Following acquisition, the Company evaluates the prospective commercialization of the acquired intangible asset. Depending upon the results of the evaluation, the Company commences amortization of the assets over their expected useful lives, which is generally less than ten years. Long-lived assets

Long-lived assets are amortized over the estimated useful life of the asset and evaluated periodically for impairment in accordance with Section 3063 Impairment of Long-lived Assets (“Section 3063”). Section 3063 requires that long-lived assets, excluding goodwill and assets with infinite useful lives, be evaluated for impairment when events or changes in facts and circumstances indicate that their carrying value may not be recoverable. Events or changes in facts or circumstances include but are not restricted to: a strategic change in business direction; significant decrease in stock price; discontinuance of a product line or development program; or a restructuring. If one of these events or circumstances indicates that the carrying value of an asset may not be recoverable, or that our estimated amortization period was not appropriate, we would record an impairment charge against of our long-lived assets. The amount of impairment would be measured as the difference between the carrying value and the fair value of the impaired asset as calculated using a net realizable value methodology. An impairment charge would be recorded as an operating expense in the period of the impairment and as a reduction in carrying value. At December 31, 2008, given the global economic crisis, capital markets uncertainty and the decrease in our stock price, events warrant an impairment test on definite lived intangible assets. Our definite lived intangible assets are licenses to patents covering technologies under research and development with a net book value at December 31, 2008 of approximately $0.9 million. Asset recoverability tests were performed using undiscounted cash flows and grouping definite lived intangible assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities and products or programs. Cash flow analysis included five years of forecasted cash flows post projected drug product launch and costs leading up to such time. Industry standard contribution margins were used modeling a typical pharma partnership where sales, marketing and distribution activities handled by a partner. These undiscounted cash flows supported the recoverability of the definite lived intangible assets as did sensitivity analysis using a 25% reduction in projected revenues.

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 CRITICAL ACCOUNTING POLICIES AND ESTIMATES (continued) Long-lived assets (continued)

Due to the above considerations, which are based on the best available information, no long-lived assets impairment provision has been recorded for fiscal 2008. However, given the continued economic and capital markets challenges, asset recoverability tests will continue to be performed in future periods. Research and development costs

R&D costs are charged as an expense in the period in which they are incurred. Development costs are charged as an expense in the period in which they are incurred unless they meet generally accepted criteria under Canadian GAAP for deferral and amortization. No development costs have been capitalized to date. Patent costs

The costs incurred in establishing and maintaining patents for intellectual property developed are expensed in the period incurred. Stock-based compensation

The Company grants discretionary stock options for the purchase of common shares. The Company accounts for all stock-based payments to employees and non-employees using the fair value based method. Under the fair value based method, stock-based payments to employees and non-employees are measured at the fair value of the equity instruments issued. The fair value of stock-based payments to non-employees is periodically re-measured until the services are provided or the options vest, and any change therein is recognized over the period. ACCOUNTING PRONOUCEMENTS FOR FUTURE ADOPTION Goodwill and intangible assets

In January 2008, the CICA issued Section 3064 “Goodwill and Intangible Assets”. This new accounting standard, which is effective for fiscal periods beginning on or after January 1, 2009, replaces existing Section 3062 “Goodwill and Other Intangible Assets” and Section 3450 “Research and Development Costs” and establishes the standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The Company is currently assessing the future impact of this new standard on its financial statements. International Financial Reporting Standards

In February 2008, the Accounting Standards Board of Canada confirmed that Canadian GAAP for publicly accountable enterprises will be converged with International Financial Reporting Standards (“IFRS”) effective for fiscal years beginning on or after January 1, 2011. The Company will therefore be required to report using IFRS commencing with its unaudited interim consolidated financial statements for the three months ended March 31, 2011, which must include the interim results for the three months ended March 31, 2010 prepared on the same basis. IFRS uses a conceptual framework similar to Canadian GAAP, but there are some significant differences on recognition, measurement and disclosures.

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 ACCOUNTING PRONOUNCEMENTS FOR FUTURE ADOPTION (continued) International Financial Reporting Standards (continued)

Implementing IFRS will have an impact on accounting, financial reporting and supporting IT systems and processes. It may also have an impact on actual commitments involving GAAP based clauses, long-term employee compensation plans and performance metrics. Accordingly, the Company is in the process of developing its IFRS changeover plan which will include considerations such as measures to provide extensive training to key finance personnel, to review contracts and agreements and to increase the level of awareness and knowledge amongst management, the Board of Directors and the Audit Committee. Additional resources may be engaged to ensure the timely conversion to IFRS. At January 30, 2009, the Company completed the initial diagnostic between Canadian GAAP and IFRS. While the effects of IFRS have not yet been fully determined, the Company has identified a number of key areas where it is likely to be impacted by changes in accounting policy. These include:

• Property, plant and equipment

• Intangible assets

• Impairment of assets

• Provisions and contingent liabilities

• Share-based payments

• Related party disclosure

• Presentation of statement of cash flows

A detailed diagnostic is planned for Q3 2009, and no decisions have yet been made with regard to accounting policy choices. As a first time adopter of IFRS, the Company is required to apply IFRS 1 “First time adoption of International Financial Reporting Standards”. A number of exemptions are available under this Standard which the Company is currently evaluating including electing to use fair value at the transition date as deemed cost for capital assets in certain circumstances.

23


MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 RISKS AND UNCERTAINTIES The Company is at an early stage of development and has incurred losses and will continue to incur losses in the foreseeable future. Developing new technologies will require further significant time and expense. It may be a number of years before the Company's technology begins to generate revenues, if at all. There can be no assurance that any of the Company’s developments will be successful or successful enough to be commercially viable. The Company is subject to risks, events and uncertainties, or “risk factors”, associated with being in the biopharmaceutical industry, and being an enterprise with projects in the research and development stage. Such risk factors could cause reported financial information to not necessarily be indicative of future operating results or of future financial position. The Company cannot predict all of the risk factors, nor can it assess the impact, if any, of such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause future results or financial position to differ materially from either those reported or those projected in any forward-looking information. Accordingly, historical financial information and forward-looking information should not be relied upon as a prediction of future results. Some of the risks and uncertainties affecting the Company, its business, operations and results include, but are not limited to: the Company’s need for additional funding through to commercialization, which may not be available on acceptable terms or at all; the fact that the Company’s success is dependent on its ability to obtain patents, licenses and government approvals to technology critical to the development of its business as well as meeting acceptable cost and performance criteria in the marketplace; the need to develop and commercialize products which will require time consuming and costly research and development, the success of which cannot be assured; the Company’s dependency on third parties for cGMP grade materials, other materials and for research, development, manufacturing and commercialization assistance and support; the Company’s dependency on assurances from, and performance by, third parties regarding licensing of proprietary technology owned by such parties or by others; government regulation and the need for regulatory approvals for both the development and commercialization of products, which are not assured; uncertainty that the Company’s products, if ultimately commercialized, will be accepted in the marketplace; risks associated with research and development, including rapid technological change and competition from pharmaceutical companies, biotechnology companies and universities, which may make the Company’s research, technology or products obsolete or uncompetitive; the need to attract and retain skilled employees and management; risks associated with claims of infringement of intellectual property and of proprietary rights, which may not be foreseeable or preventable; risks inherent in manufacturing, including scale-up, and the need to manufacture to regulatory standards; product marketing; product liability and insurance risks; risks associated with pre-clinical studies and clinical trials, including the possibility that trials may be terminated early, delayed or unsuccessful; exchange rate fluctuations; political, economic and environmental risks; changes in business strategy or development plans; the Company’s need to establish or maintain relationships with key customers, suppliers and service providers, which cannot be assured; and the risk of unanticipated expenses, any of which could cause the Company to reduce, delay or divest one or more of its research and development programs.

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MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 RISKS AND UNCERTAINTIES (continued) The Company deals with credit risk by investing surplus cash balances in short-term highly rated money market funds and bank guaranteed investment certificates. Funds are invested pursuant to the Company’s investment policy which establishes guidelines for diversification, credit ratings and maturities that maintain safety and liquidity. These guidelines are periodically reviewed by the Company’s audit committee and modified to reflect changes in market conditions. Most of the other risks as described above are considered uncontrollable by the Company. The Company’s success is also dependent on a number of other significant risks and uncertainties. For additional information, refer to the section entitled "Liquidity and Capital Resources" set out above and the section entitled “Risk Factors” in the Company’s Annual Information Form dated March 23, 2009 for its financial year ending December 31, 2008. DISCLOSURE CONTROLS AND PROCEDURES The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed in filings is recorded, processed, summarized and reported within the time periods specified in the Canadian Securities Administrators’ rules and forms. Our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) have designed our disclosure controls and procedures, or caused them to be designed under their supervision, as of December 31, 2008, to provide reasonable assurance that material information relating to the Company was made known to them and reported as required. INTERNAL CONTROL OVER FINANCIAL REPORTING Our CEO and CFO are responsible for the design of internal controls over financial reporting, or for causing them to be designed under their supervision and, as of December 31, 2008, for evaluating the effectiveness of such internal controls, to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of external financial statements in accordance with Canadian GAAP. Regardless of how well an internal control system is designed and operated, it can provide only reasonable, not absolute, assurance that it will prevent or detect all misstatements resulting from error or fraud due to the inherent limitations of any internal control system. The CEO and CFO have evaluated the design and the effectiveness of the Company’s internal controls and procedures over financial reporting as of the end of the period covered by this filing, and believe the design and operational effectiveness to be sufficient to provide such reasonable assurance. There were no changes that occurred during 2008 Q4 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

25


MANAGEMENT’S DISCUSSION AND ANALYSIS DECEMBER 31, 2008 OTHER MD&A REQUIREMENTS Outstanding Share Data As at the date of this report, the Company has 75,894,044 common shares issued and outstanding. In addition, the Company has 4,857,500 options outstanding to purchase common shares of the Company. Of the options currently outstanding, approximately 3.5 million are exercisable into an equivalent number of common shares of the Company at exercise prices ranging from $0.51 to $1.00 and with an average exercise price of $0.81. The Company also has 584,413 warrants outstanding entitling holders to purchase common shares at an exercise price of $0.71 up to May 23, 2010. For a detailed summary of the outstanding securities convertible into, exercisable or exchangeable for voting or equity securities as at December 31, 2008, refer to Note 8(b) and (d) in the audited 2008 annual financial statements of the Company.

26

“PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.

PricewaterhouseCoopers LLP Chartered Accountants PricewaterhouseCoopers Place 250 Howe Street, Suite 700 Vancouver, British Columbia Canada V6C 3S7 Telephone +1 604 806 7000 Facsimile +1 604 806 7806

March 23, 2009 Auditors’ Report To the Shareholders of Protox Therapeutics Inc. We have audited the balance sheets of Protox Therapeutics Inc. as at December 31, 2008 and 2007 and the statements of operations, comprehensive loss and 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 financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. (signed) PricewaterhouseCoopers LLP Chartered Accountants

27

Protox Therapeutics Inc. Balance Sheets December 31, 2008 and 2007

The accompanying notes are an integral part of these financial statements.

Approved by the Board of Directors /s/ Frank Holler Director /s/ Nitin Kaushal Director

December 31, 2008

$

December 31, 2007

$ Assets

Current assets Cash and cash equivalents 6,652,810 11,410,018 Short-term investments 612,412 - Other receivables 152,855 166,793 Prepaid expenses 41,225 29,953 7,459,302 11,606,764 Property and equipment (note 6) 79,224 165,608 Intangible assets (note 7) 919,488 1,141,292 8,458,014 12,913,664

Liabilities

Current liabilities Accounts payable 514,906 742,609 Accrued liabilities 766,778 951,797 Current portion of lease obligations (note 8) 4,995 8,575 1,286,679 1,702,981 Long-term portion of lease obligations (note 8) 3,325 7,736 1,290,004 1,710,717

Shareholders’ Equity

Common shares (note 9(a)) 32,628,223 28,246,445 Common share purchase warrants (note 9(b)) 158,169 1,578,781 Other equity (note 9(c)) 4,780,754 2,857,797 Deficit accumulated during the development stage (30,399,136) (21,480,076) 7,168,010 11,202,947 8,458,014 12,913,664

Commitments (note 14) Liquidity risk (note 4(b))

28

Protox Therapeutics Inc. Statements of Operations, Comprehensive Loss and Deficit For the years ended December 31, 2008 and 2007


Cumulative from

inception to December 31,

2008

$ 2007

$ 2008

$

Expenses Research and development (note 13) 6,222,494 4,889,751 19,287,008 General and administrative 2,298,190 2,009,950 8,738,752 Stock-based compensation (note 9(d)) 416,321 467,164 2,284,576 Amortization of property and equipment 90,241 101,267 376,591 Write-off of property and equipment (note 6) 13,418 - 13,418 9,040,664 7,468,132 30,700,345 Other income (expense) Interest income 292,970 351,860 890,268 Interest expense (607) (2,851) (17,461)Forgiveness of debt - - 7,485 Foreign exchange loss (170,759) (326,929) (579,083) 121,604 22,080 301,209 Net and comprehensive loss for the year (8,919,060) (7,446,052) (30,399,136) Deficit accumulated during the development

stage - Beginning of period (21,480,076) (14,034,024) - Deficit accumulated during the development

stage - End of period (30,399,136) (21,480,076) (30,399,136) Basic and diluted loss per share (0.12) (0.13) Weighted average number of outstanding

shares 72,940,568 59,390,387

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Protox Therapeutics Inc. Statements of Cash Flows For the years ended December 31, 2008 and 2007


Cumulative from inception to

December 31,

2008

$ 2007

$ 2008

$ Cash flows from operating activities Loss and comprehensive loss for the year (8,919,060) (7,446,052) (30,399,136)Items not affecting cash

Stock-based compensation (note 9(d)) 416,321 467,164 2,284,576 Amortization of property and equipment 90,241 101,267 376,591 Amortization of intangible assets 221,804 169,384 475,880 Write-off of property and equipment (note 6) 13,418 - 13,418 License fees paid in shares - - 184,091 Forgiveness of debt - - (7,485)Preferred shares to settle accounts payable - - 50,744

Change in non-cash working capital Other receivables 13,938 (29,094) (140,106)Prepaid expenses (11,272) 35,528 (33,038)Accounts payable (227,703) (103,444) 445,086 Accrued liabilities (185,019) 539,027 766,778

(8,587,332) (6,266,220) (25,982,601)

Cash flows from investing activities Increase in short-term investments (612,412) - (612,412)Purchase of property and equipment (17,275) (77,302) (469,234)Acquisition of intangible assets (notes 7 and 11) - (104,840) (1,290,528)

(629,687) (182,142) (2,372,174)

Cash flows from financing activities Issuance of common shares from private placements -

net of issuance cash costs (note 9(a)) 4,379,800 - 21,227,311 Issuance of common shares from public offering - net

of costs - - 3,819,922 Cash acquired on reverse takeover - - 1,064,754 Issuance of preferred shares - - 651,110 Issuance of common shares on exercise of warrants 18,851 7,803,986 8,007,578 Issuance of common shares on exercise of options 69,151 78,825 240,591 Capital lease financing - - 135,204 Capital lease payments (7,991) (45,378) (126,885)Due to shareholder - - (12,000)

4,459,811 7,837,433 35,007,585

(Decrease) increase in cash and cash equivalents (4,757,208) 1,389,071 6,652,810

Cash and cash equivalents - Beginning of year 11,410,018 10,020,947 -

Cash and cash equivalents - End of year 6,652,810 11,410,018 6,652,810 Supplemental cash flow information (note 15)

30

Protox Therapeutics Inc. Notes to Financial Statements December 31, 2008 and 2007

1 Nature of operations

Protox Therapeutics Inc. (“Protox” or the “Company”) is amalgamated under the Company’s Act of British Columbia and commenced operations on January 11, 2002.

Protox is a development stage biopharmaceutical company that focuses on the research, development and commercialization of receptor targeted therapeutic fusion proteins for the treatment of disease. These fusion proteins specifically deliver potent payloads derived from engineered bacterial toxins or fully human Bcl-2 derived proteins to target cancer and other diseased cells. The Company is considered to be in the development stage as most of its efforts have been devoted to basic research and development activities to date. The eventual profitability of the Company and its ability to continue operating as a going concern is dependent upon obtaining additional financing as required, successful development and commercialization of its products, receiving regulatory approvals and generating cash from operations.

Due to the impact of global economic and market conditions on our share price late in 2008, the Company did not realize any of the $7.1 million potential warrant exercise proceeds as none of the close to 11.0 million 2006 financing round warrants remaining outstanding were exercised prior to expiry on December 22, 2008. Consequently, as a proactive action, the Company undertook a comprehensive review of current development and discovery programs, operations and anticipated expenditures with the view to reduce or defer costs where possible to maximize available funds for prior initiatives. Management believes that current cash resources should enable the Company to execute its core business plan / priority initiatives and meet its projected cash requirements up to the end of 2009. However, the Company's working capital may not be sufficient to meet its stated business objectives in the event of unforeseen circumstances or a change in the strategic direction of the Company. When, or if, the Company requires additional capital, there can be no assurance that the Company will be able to obtain further financing on favourable terms, if at all.

As required, the Company will continue to finance its operations through the sale of equity or pursue non-dilutive funding sources available to the Company in the future. Proceeds of up to $0.4 million from the exercise of the approximate 0.6 million 2008 financing round warrants currently outstanding - exercisable at $0.71 - to purchase common shares could be received hereafter up to May 23, 2010. The exercise of any outstanding stock options could also provide additional cash resources. However, the current share price is significantly below the exercise price of both the warrants and stock options. Additional funding could also be provided from collaborative arrangements established in the future with pharmaceutical or biotechnology companies in relation to products and technologies under development by the Company.

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2 Significant accounting policies

a) Generally accepted accounting principles

These financial statements have been prepared in accordance with accounting principles generally accepted in Canada (“Canadian GAAP”) and are presented in Canadian dollars.

b) Change in accounting policies

Capital Disclosures

On January 1, 2008, the Company prospectively adopted the Canadian Institute of Chartered Accountants (“CICA”) Handbook Section 1535, Capital Disclosures (“Section 1535”). This new accounting standard establishes the requirements for disclosing information about an entity’s capital and how it is managed. Section 1535 requires the disclosure of (i) an entity’s objectives, policies and processes for managing capital; (ii) quantitative data about what the entity regards as capital; (iii) whether the entity has complied with any capital requirements; and if it has not complied, the consequences of such non-compliance.

Financial Instruments - Disclosure and Presentation

On January 1, 2008, the Company prospectively adopted CICA Handbook Section 3862, Financial Instruments - Disclosures (“Section 3862”) and CICA Handbook Section 3863, Financial Instruments - Presentation (“Section 3863”). These sections provide enhanced and expanded disclosure requirements to complement the changes in accounting policy adopted on January 1, 2007 in accordance with Section 3855, Financial Instruments - Recognition and Measurement.

Section 1535, Section 3862 and Section 3863 relate to disclosure and presentation only (see notes 3 and 4) and did not have any impact on our financial results.

c) Development stage company

The accompanying financial statements have been prepared in accordance with the provisions of Accounting Guideline No. 11, “Enterprises in the Development Stage”.

d) Use of estimates

The preparation of 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 and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could significantly differ from those estimates, including those estimates relating to long-lived and intangible assets; warrants; stock options and stock-based compensation.

32


e) Cash and cash equivalents

Cash and cash equivalents consist of cash on deposit and highly liquid short-term interest bearing securities with a maturity at the date of purchase of 90 days or less. Cash and cash equivalents are classified as held-for-trading and measured at fair value. Gains and losses resulting from the change in fair values of cash and cash equivalents are included in interest income and foreign exchange gains and losses in the statements of operations, comprehensive loss and deficit.

f) Short-term investments

Short-term investments consist of guaranteed investment certificates, bankers’ acceptances and commercial paper with original terms to maturity of more than 90 days but less than one year, and are recorded at cost plus accrued interest. The carrying value of short-term investments approximates their market value.

g) Property and equipment

Property and equipment are stated at cost less accumulated amortization. Amortization is recorded on a straight-line basis over the estimated lives of the property and equipment as follows:

Computer hardware and software 3 years Laboratory equipment 4 years Furniture and fixtures 5 years Leasehold improvements term of the lease

h) Intangible assets

Intangible assets include proprietary rights, intellectual property, patent rights and technology rights which have been acquired from third parties. Intangible assets are carried at cost less accumulated amortization. The Company evaluates the useful economic life of the specific intangible asset and amortizes the asset accordingly. The amortization period is generally less than ten years.

i) Impairment of long-lived assets

The Company periodically reviews the useful lives and the carrying value of its long-lived assets. Long-lived assets are reviewed for impairment upon the occurrence of events or changes in circumstances indicating that the carrying value of the asset may not be recoverable, as measured by comparing their net book value to the estimated undiscounted future cash flows generated by their use. Impaired assets are recorded at fair value, determined principally using discounted future cash flows expected from their use and eventual disposition. As at December 31, 2008 and 2007, no such impairment losses were recorded.

33


j) Leases

Leases entered into are classified as either capital or operating. Leases that transfer substantially all benefits and risks of ownership are accounted for as capital leases. At the time a capital lease is entered into, an asset is recorded together with its related long-term obligation to reflect the purchase and financing. All other leases are accounted for as operating wherein rental payments are expensed as incurred.

k) Research and development costs

Research and development costs are charged as an expense in the period in which they are incurred. Development costs are charged as an expense in the period in which they are incurred unless they meet generally accepted criteria under Canadian GAAP for deferral and amortization. No development costs have been capitalized to date.

l) Patent costs

The costs incurred in establishing and maintaining patents for intellectual property developed are expensed in the period incurred.

m) Investment tax credits

Refundable investment tax credits are recorded when the qualifying expenditures have been incurred and if it is reasonably assured that the tax credits will be realized. The investment tax credits reduce the cost of capital assets and the research and development expenses to which they relate. Refundable tax credits are subject to audit by the relevant tax authorities and amounts recognized may change.

n) Future income taxes

Future income taxes are recognized for the future income tax consequences attributable to differences between the carrying values of assets and liabilities and their respective income tax bases. Future income tax assets and liabilities are measured using substantively enacted income tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on future income tax assets and liabilities of a change in rates is included in operations in the period that includes the substantive enactment date. A valuation allowance is recorded against the future tax asset to the extent that it is more likely than not that some or all of the future tax assets will not be realized.

o) Loss per share

Basic and diluted loss per share is calculated using the weighted average number of common shares outstanding. The number of warrants and options excluded from the calculation of diluted loss per share, because their inclusion would have been anti-dilutive, was 5,466,913 for the year ended December 31, 2008 (2007 - 15,947,917).

34


p) Stock-based compensation

The Company grants discretionary stock options for the purchase of common shares.

The Company accounts for all stock-based payments to employees and non-employees using the fair value based method. Fair value is determined using the Black-Scholes option pricing model and, as such, stock-based payments to employees and non-employees are measured at the fair value of the equity instruments issued. The fair value of stock-based payments to non-employees is periodically re-measured until the services are provided or the options vest, and any change therein is recognized over the period.

q) Translation of foreign currency

The functional currency of the Company is the Canadian dollar. Accordingly, monetary items denominated in a foreign currency are translated into Canadian dollars at exchange rates in effect at the balance sheet date and non-monetary items are translated at rates of exchange in effect when the assets were acquired or obligations incurred. Revenue and expenses are translated at rates in effect at the time of the transactions. Foreign exchange gains and losses are included in the determination of loss for the year.

r) Future accounting policy changes

Goodwill and Intangible Assets

In January 2008, the CICA issued Section 3064, Goodwill and Intangible Assets. This new accounting standard, which is effective for fiscal periods beginning on or after January 1, 2009, replaces existing Section 3062, Goodwill and Other Intangible Assets, and Section 3450, Research and Development Costs and establishes the standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets. The Company will adopt this new standard for the first quarter ended March 31, 2009 and we are currently assessing the future impact of this new standard on our financial statements.

International Financial Reporting Standards

In February 2008, the Accounting Standards Board of Canada confirmed that Canadian GAAP for publicly accountable enterprises will be converged with International Financial Reporting Standards (“IFRS”) effective for fiscal years beginning on or after January 1, 2011. The Company will therefore be required to report using IFRS commencing with its unaudited interim financial statements for the three months ended March 31, 2011, which must include the interim results for the three months ended March 31, 2010 prepared on the same basis. IFRS uses a conceptual framework similar to Canadian GAAP, but there are some significant differences on recognition, measurement and disclosures. The Company is currently assessing the future impact of the transition to IFRS on its financial statements.

35


3 Capital disclosure

The Company’s objectives when managing capital are to safeguard its accumulated capital and ensure a sufficient liquidity position in order to maintain its ability to continue as a going concern and to advance its research, development and commercialization activities. The capital structure of the Company consists of the components of shareholders’ equity.

Since inception, the Company has primarily financed its liquidity needs through a public offering and several private placements of common shares. When possible, the Company tries to optimize its liquidity position through non-dilutive sources, including grants, interest income and strategic partnership arrangements.

The Company manages its capital structure and will make adjustments to it based on economic conditions and the risk characteristics of the underlying assets. The Company, upon approval from its board of directors, will balance its overall capital structure through new share or debt issuances or by undertaking other activities as deemed appropriate under specific circumstances.

The Company is not subject to externally imposed capital requirements.

4 Financial instruments and financial risk management

a) Financial instruments

The Company has classified its financial instruments as follows:

Carrying value at

December 31

Financial instrument

Classification

Measurement

2008

$ 2007

$

Cash and cash equivalents Held-for-trading Fair value 6,652,810 11,410,018 Short-term investments Held-for-trading Fair value 612,412 - Other receivables

Loans and receivables

Amortized cost using the effective interest method 152,855 166,793

Accounts payable and accrued liabilities

Other financial liabilities

Amortized cost using the effective interest method 1,281,684 1,694,406

Section 3855 requires that the carrying values of short-term investments, other receivables, accounts payable and accrued liabilities be amortized over their expected life using the effective interest method (“EIM”). Application of the EIM did not result in any significant differences in the Company’s amortization and as such the carrying amount is a reasonable approximation of their fair values due to the short-term nature of these instruments. Short-term investments have a maturity of September 28, 2009. The Company did not have any held-to-maturity or available-for-sale financial instruments, nor did it acquire or hold any derivative products during the year ended December 31, 2008 (2007 - nil).

36


b) Financial risk management

The Company is exposed to certain financial risks, including credit risk, liquidity risk and market risk.

Credit risk

Credit risk is the risk of an unexpected loss if a customer or third party to a financial instrument fails to meet its contractual obligations and arises principally from the Company’s cash and cash equivalents, short-term investments and other receivables. Being in the development stage, the Company does not have any customers. The Company has established investment guidelines relative to diversification, credit ratings and maturities that maintain safety and liquidity. These guidelines are periodically reviewed by the Company’s audit committee and modified to reflect changes in market conditions. The Company has $6,720,523 million invested in highly rated money market funds and bank guaranteed investment certificates which are subject to credit risk.

Liquidity risk

Our consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. To the extent that the Company does not believe it has sufficient liquidity to meet its current obligations, the board of directors considers securing additional funds through equity, debt or partnering transactions. The board of directors approves the Company’s annual operating and capital budgets as well as any material transactions outside the ordinary course of business. Of the aggregate accounts payable outstanding and accrued liabilities totalling $1,281,684 as at December 31, 2008, $759,888 is payable within ninety days and the balance of $521,796 is payable within one year. Refer to Note 8 concerning future capital lease obligation payments. All milestone based commitment amounts that became due during fiscal 2008 were paid and no other future commitment payments are included in accrued liabilities as at December 31, 2008 as achievement of the related milestones has yet to occur - refer to Note 14.

Market risk

Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates, will affect the Company’s income or valuation of its financial instruments.

Foreign currency risk is limited to the portion of the Company’s business transactions denominated in currencies other than the Canadian dollar, primarily expenses for research and development incurred in US dollars. As at December 31, 2008, US dollar denominated cash and cash equivalents totalled US$375,798 (2007 - US$1,925,507) and foreign denominated accounts payable and accrued liabilities included US$272,667 (2007 - US$415,088) and €318,281 (2007 - €400,000). Based on the US dollar and Euro balance sheet exposure at December 31, 2008, with other variables unchanged, a 10% change in the US dollar and Euro compared to the Canadian dollar would not have had a significant impact on net and comprehensive loss.

Interest rate risk relates primarily to cash and short-term investments. At December 31, 2008, with other variables unchanged, a 1% absolute change in interest rates would not have had a significant impact on net and comprehensive loss.

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5 Projects under development

The Company’s projects under development relate to its three complementary technology platforms: PORxinTM, INxinTM and HUMxinTM.

PORxin is based on an engineered version of proaerolysin, a protein secreted by the bacteria Aeromonas hydrophilia. The lead drug from the PORxin platform, PRX302, has been engineered to be activated by the prostate specific antigen (“PSA”), an enzyme that is produced at high levels in the prostates of patients with prostate cancer and benign prostatic hyperplasia (“BPH”). Once PRX302 is activated by PSA, it combines with other activated PRX302 molecules to form a mushroom shaped structure that is able to perforate the cell membrane. The cell contents leak out through the resulting pore and the cell dies.

INxin is based on a novel protein comprised of interleukin-4 (“IL-4”) and Pseudomonas exotoxin. The IL-4 portion of the protein binds to IL-4 receptors, which are highly expressed in a large number of primary and metastatic cancer cells. The Pseudomonas exotoxin portion causes cell death by arresting protein synthesis.

HUMxin, a next-generation platform, is a program to develop fully humanized receptor targeted therapeutic fusion proteins using the non-immunogenic Bcl-2 family of proteins and is currently in the discovery research stage.

The primary activities associated with these projects include discovery research, pre-clinical testing, clinical trials and other product development and support activities.

Cumulative research and development expenses as at December 31, 2008 relating to the projects totalled $19,287,008 (2007 - $13,064,514). Cumulative property and equipment costs incurred on these projects as at December 31, 2008 totalled $306,123 (2007 - $303,965) for laboratory equipment and leasehold improvements. As at December 31, 2008, the Company has not deferred any development costs due to the inherent uncertainty of these products reaching successful commercialization.

6 Property and equipment

Property and equipment consist of the following:

December 31, 2008

Cost

$

Accumulated amortization

$

Net book value

$

Computer hardware and software 144,723 114,781 29,942 Laboratory equipment 242,871 216,783 26,088 Furniture and fixtures 18,387 15,014 3,373 Leasehold improvements 26,659 6,838 19,821

432,640 353,416 79,224

38


December 31, 2007

Cost

$


$

Net book value

$

Computer hardware and software 129,606 77,560 52,046 Laboratory equipment 240,712 172,232 68,480 Furniture and fixtures 18,388 11,877 6,511 Leasehold improvements 63,253 24,682 38,571

451,959 286,351 165,608

During the year ended December 31, 2008, the Company wrote-off certain leasehold improvements no longer in use with a cost of $36,593 and related accumulated amortization of $23,175, resulting in a net charge of $13,418 to the statements of operations and comprehensive loss.

7 Intangible assets

December 31, 2008

Cost

$


$

Net book value

$

Patents and technology rights 1,395,368 475,880 919,488

December 31, 2007

Cost

$


$

Net book value

$

Patents and technology rights 1,395,368 254,076 1,141,292

Effective April 4, 2007, the Company entered into an asset purchase agreement with Medicenna Ventures Inc. (“Medicenna”) for the purchase of Medicenna’s HUMxin Program and transfer of its related Collaborative Research and Development Agreement (“CRADA”) with the U.S. National Institute of Health (“NIH”) and all technology license option rights and entitlements thereunder (collectively the “HUMxin Assets”). The HUMxin Program is a program to develop fully humanized fusion toxins based upon the Bcl-2 family of proteins. The HUMxin Assets purchase price has been capitalized at the exchange amount of $209,680. Intangible assets are amortized on a straight line basis over seven years.

39


8 Lease obligations payable

The minimum payment amounts relating to leases in effect are as follows:

December 31, 2008

$

December 31, 2007

$

Capital equipment leases 8,320 16,311 Less: Current portion 4,995 8,575

Long-term portion 3,325 7,736

Lease payments over the next two years are as follows:

Fiscal year

Amount

$

2009 4,995 2010 3,746 Total lease payments 8,741 Less: Interest portion 421 Capital lease payments 8,320

40


9 Shareholders’ equity

a) Common shares

Authorized: Unlimited (2007 - unlimited) common shares without par value

Issued: 75,894,044 (2007 - 68,473,933) common shares without par value

Number of

shares Amount

$

Balance - December 31, 2006 56,243,289 18,068,488

Issuance of common shares on exercise of warrants 12,006,132 9,954,122 Issuance of common shares on exercise of options 96,658 118,995 Issuance of common shares for intangible asset acquisition 127,854 104,840 Balance - December 31, 2007 68,473,933 28,246,445 Issuance of common shares from private placement at $0.70 per unit

- net of share issuance cash costs of $448,757 6,897,939 4,379,800 Issuance of common shares as finance fee on private placement - net

of shares issuance costs of $67,600 96,571 - Fair value of common share purchase warrants issued - (158,169) Issuance of common shares on exercise of warrants 29,000 22,991 Issuance of common shares on exercise of options 396,601 137,156

Balance - December 31, 2008 75,894,044 32,628,223

In May 2008, the Company completed a brokered private placement financing. The financing consisted of the issuance of 6,897,939 common shares at a price of $0.70 resulting in gross proceeds of $4,828,557. In conjunction with the financing, the Company issued 482,855 non-transferable warrants to the agent and 101,558 warrants as a finder’s fee with a combined fair value of $158,169 (note 9(b)). In addition, 96,571 common shares were issued to the agent as payment of a corporate finance fee in the amount of $67,600. The cash costs of the financing amounted to $448,757 resulting in net proceeds of $4,379,800.

During 2007, the Company issued 12,006,132 common shares for proceeds of $7,803,986 on the exercise of 11,614,512 share purchase warrants related to the November 2005 non-brokered private placement financing and 391,620 share purchase warrants related to the dual tranche brokered private placement financing in November and December 2006.

41


b) Warrants

At December 31, 2008, the Company had warrants outstanding to purchase 584,413 common shares (2007 - 10,967,882) at an exercise price of $0.71 per share (2007 - $0.65) with an expiry date of May 23, 2010.

The following table summarizes the continuity of the Company’s warrants:

Number outstanding

Weighted average

exercise price $

Fair value at da

$

Balance outstanding - December 31, 2006 23,145,614 0.65 3,759,857 Exercised warrants (12,006,132) 0.65 (2,150,137) Expired warrants (171,600) 0.65 (30,939) Balance outstanding - December 31, 2007 10,967,882 0.65 1,578,781

Issued as part of private placement

commission 584,413 0.71 158,169 Exercised warrants (29,000) 0.65 (4,140) Expired warrants (10,938,882) 0.65 (1,574,641) Balance outstanding - December 31, 2008 584,413 0.71 158,169

The following table summarizes the weighted average assumptions used in the Black-Scholes model with respect to the valuation of warrants issued in 2008 (no warrants were issued during 2007):

December 31 2008

Expected hold period to exercise 2 years Volatility 59% Dividend yield 0% Risk-free interest rate 2.99%

42


c) Other equity

At December 31, 2008, the Company had other equity recorded as follows:

Amount

$

Balance outstanding - December 31, 2006 2,399,865 Stock compensation expense 467,164 Expiration of warrants 30,939 Issuance of common shares on exercise of options (40,171) Balance outstanding - December 31, 2007 2,857,797 Stock compensation expense 416,321 Expiration of warrants 1,574,641 Issuance of common shares on exercise of options (68,005) Balance outstanding - December 31, 2008 4,780,754

d) Stock options

The Company’s stock option plan (the “Plan”) provides for the granting of options for the purchase of common shares of the Company at the fair market value of the Company’s common shares on the date of the option grant. Options are granted to employees and non-employees. The board of directors or a committee appointed by the board of directors administers the Plan and has discretion as to the number, vesting period and expiry date of each option award. The Plan is based on a rolling percentage of options issuable up to 10% of the Company’s outstanding common shares. As of December 31, 2008, the Company had 75,894,044 common shares issued and outstanding resulting in current authorization to have a maximum of 7,589,404 options outstanding under the Plan.

43


The following table summarizes the continuity of the Company's stock options:

Number of options

Weighted average

exercise price $

Balance outstanding - December 31, 2006 3,281,535 0.72 Options granted 2,001,000 0.77 Options forfeited (205,842) 0.73 Options expired - 1.00 Options exercised (96,658) 0.82 Balance outstanding - December 31, 2007 4,980,035 0.73 Options granted 985,000 0.81 Options forfeited (255,000) 0.83 Options expired (430,934) 0.51 Options exercised (396,601) 0.17 Balance outstanding - December 31, 2008 4,882,500 0.81

The following table summarizes stock options outstanding and exercisable at December 31, 2008:

Options outstanding Options exercisable

Exercise price

$

Number outstanding

Weighted average

remaining contractual

life (years)

Weighted average

exercise price $

Number exercisable

Weighted average

exercise price $

0.51 - 0.54 670,000 2.2 0.52 613,332 0.52 0.60 50,000 4.7 0.60 4,166 0.60 0.64 225,000 3.1 0.64 175,000 0.64 0.75 - 0.80 1,803,500 3.4 0.77 724,498 0.77 0.87 520,000 4.1 0.87 75,000 0.87 0.90 150,000 3.7 0.90 75,000 0.90 1.00 1,464,000 1.1 1.00 1,313,832 1.00 4,882,500 2.6 0.81 2,980,828 0.82

During the year ended December 31, 2008, the Company granted 910,000 (2007 - 1,776,000) options to employees (including directors) and granted 75,000 (2007 - 225,000) options to non-employees.

Stock-based compensation expense relating to stock options for the year ended December 31, 2008 was $368,504 (2007 - $429,580) for employees and $47,817 (2007 - $37,584) for non-employees for a combined amount of $416,321 (2007 - $467,164).

44


The fair value of each stock option granted to employees and non-employees was estimated using the Black-Scholes option pricing model with the following assumptions:

December 31, 2008 2007 Expected life of the option 2 - 4 years 2 - 3 years Volatility 49% - 73% 73% - 79% Dividend yield 0% 0% Risk-free interest rate 2.74% - 3.75% 3.75% - 4.35%

10 Income taxes

As at December 31, 2008, the Company has unused non-capital losses of $20,740,812 and accumulated scientific research and experimental development expenditures in the amount of $6,686,304 that are available to reduce taxable income of future years. The non-capital losses expire as follows:

Non-capital losses

Amount $

2009 288,822 2013 - 2014 5,467,501 2025 - 2027 14,984,489 20,740,812

In addition, the Company has unused investment tax credits in the amount of $2,101,882 which may be applied to reduce future income taxes payable. The investment tax credits expire as follows:

Amount $

2014 212,680 2015 346,540 2016 84,173

2017 148,655 2018 212,330 2026 - 2028 1,097,504 2,101,882

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Future income tax assets and liabilities comprise the following:

Years ended December 31, 2008

$ 2007

$

Future income tax assets Non-capital losses 5,185,203 3,989,906 Share issue costs 239,932 239,777 Scientific research and development 1,671,576 1,049,412 Investment tax credits 1,713,736 971,569 Other 388,652 193,770

9,199,099 6,444,434

Less: Valuation allowance (9,199,099) (6,444,434) - -

A reconciliation of the statutory income tax rate applied to the net loss for the year to the income tax recovery is as follows:

Years ended December 31, 2008 2007

Statutory income tax rate 31.00% 34.12% $ $ Income tax recovery based on statutory rate (2,764,909) (2,540,593) Increase in valuation allowance 2,754,665 1,342,972 Change in income tax rates 914,718 1,447,735 Increase in investment tax credits (488,292) (387,939) Income tax effect on expiry of non-capital loss 2,643 2,385 Increase in share issuance costs (160,071) - Return to provision and other permanent differences (258,754) 135,440

- -

11 Related party transactions

During the year ended December 31, 2008, certain directors and a former officer, who remains a significant shareholder, provided business advisory and scientific consulting services to the Company pursuant to consulting and other agreements. The Company incurred related expenses of $131,670 (2007 - $244,484) under such agreements. These transactions were incurred in the normal course of business and recorded at their exchange amounts. As of October 2008, consulting contracts for two directors have been replaced with remuneration now provided under the Company’s independent director compensation program. At December 31, 2008, $2,310 was owed for scientific consulting services provided and included in accounts payable (2007 - $nil).

46


Effective April 4, 2007, the Company entered into an asset purchase agreement with Medicenna for the purchase and transfer of Medicenna’s HUMxin technology platform (“HUMxin”) and related license option rights to the Company. HUMxin is a program to develop fully humanized fusion proteins based upon the Bcl-2 family of proteins. Prior to joining the Company, Dr. Merchant, through Medicenna, had worked with the NIH to develop HUMxin. Medicenna entered into a CRADA with the NIH related to HUMxin. The CRADA has been transferred to the Company as part of this transaction. Medicenna was founded by Dr. Merchant, and in addition to Dr. Merchant, two directors of the Company are also shareholders of Medicenna. HUMxin was acquired for the exchange amount of $209,680, representing the audited cumulative HUMxin CRADA and related costs incurred by Medicenna, and was capitalized as an intangible asset. Upon approval from the TSX Venture Exchange, 127,854 common shares at a deemed price of $0.82 per common share, for a total value of $104,840, were issued as half of the total consideration paid to Medicenna, and the other half was paid in cash during 2007. No further technology transfer transactions are contemplated between the Company and Dr. Merchant.

12 Segmented information

The Company identifies its operating segments based on business activities, management responsibility and geographical location. The Company operates within a single operating segment, being the research and development of receptor targeted fusion proteins and operates in one geographic area, being Canada. All of the Company’s assets are located in Canada.

13 Research and development

Year ended

December 31, Year ended

December 31,

Cumulative from

inception to December 31,

2008

$ 2007

$ 2008

$

Research and development costs 6,222,494 4,889,751 19,518,813 Other - - (231,805)

6,222,494 4,889,751 19,287,008

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14 Research agreements and commitments

a) Operating leases

The Company has operating lease agreements for the rental of office and laboratory facilities until April 30, 2011 and June 30, 2010, respectively. At December 31, 2008, minimum lease payments under these agreements are as follows:

Amount $

2009 89,303 2010 81,217 2011 18,861 189,381

In addition to the minimum lease payment above, annual operating costs reimbursable to the landlord are estimated to be $78,246 for 2009; $73,149 for 2010 and $17,377 for 2011.

b) PORxin license agreement for prostate cancer

In 2004, the Company signed an exclusive license agreement with John Hopkins University and the University of Victoria (“UVIC”) (collectively the “Universities”). Pursuant to the terms of this agreement, the Company paid an upfront licensing fee of $75,000 and issued 266,796 common shares to the Universities. The aggregate value of these shares was determined to be $184,089 using the market value on the date of signing the agreement and was expensed in 2004. The license agreement requires the Company to make future payments to the Universities of up to $2.9 million on the achievement of certain clinical and regulatory milestones and to pay low single digit royalties on commercial sales of resulting products. During 2008, the initial milestone payment of $77,125 became due and was paid.

c) PORxin license agreement for non-small cell lung cancer

On June 28, 2005, the Company entered into a license agreement with the National Research Council Institute for Biological Sciences and UVIC Innovation and Development Corporation whereby the Company has exclusive worldwide rights to commercialize antibody targeted PORxin for the treatment of non-small cell lung cancer. Pursuant to the terms of the agreement, the Company paid an upfront fee of $15,000 in 2005. After performing a strategic review of its programs during 2008, the Company will not be further pursuing this indication and as a result has terminated the license agreement without penalty. Accordingly, no further payments will either become payable or be paid under this license agreement.

48


d) INxin license and acquisition

On July 20, 2006, the Company acquired a Phase 2 clinical stage program for the treatment of cancer from Neurocrine Biosciences, Inc. (“Neurocrine”) and US Public Health Services (“PHS”). Under the terms of the agreement, Protox was committed to pay Neurocrine and PHS up to US$2.0 million over three years for the INxin license, regulatory assets and product related assets, of which US$1.1 million had been paid as of December 31, 2007. Obligation to pay the remaining US$0.9 million was contingent on the Company using the drug product material acquired in a future clinical trial. As the Company has manufactured a new GMP batch of drug product, the acquired drug product will not be used for clinical trial purposes. Consequently, no additional amounts are or will become payable relating to this initial commitment. However, Protox will pay PHS up to US$4.0 million in future milestone payments - based on the compound receiving US Food and Drug Administration (“FDA”) approval for at least three indications - as well as low single digit royalties on commercial sales of resulting products.

e) Manufacturing and supply agreement

On July 11, 2007, the Company entered into an agreement with Dompé pha.r.ma S.P.A. (“Dompé”) for the clinical manufacturing and commercial supply of PRX321 (the “Dompé Agreement”). Initial work order commitments under the Dompé Agreement have a total cost of up to €540,000. Total commitments of €540,000 have been expensed as follows: $584,200 (€400,000) during 2007 and $208,922 (€140,000) during 2008. As at December 31, 2008, $507,119 (€297,500) is included in accrued liabilities.

f) HUMxin license agreement

During 2008, the Company entered into a license agreement with PHS for an exclusive license related to the HUMxin technology. The patents licensed under this agreement cover fully human anti-apoptotic fusion proteins comprising GM-CSF and Bcl-xL. Pursuant to the terms of the agreement, the Company paid an initial upfront license fee of US$12,500 ($12,831) and a second instalment of US$12,500 ($15,225) is payable in 2009. The Company will also make future payments to PHS of up to US$4.8 million based on the achievement of specific certain successful clinical and regulatory milestones and the compound receiving FDA approval for at least three indications, as well as pay low single digit royalties on commercial sales of resulting products.

g) Cooperative research and development agreements

During 2008, the Company entered into a multi-year CRADA relating to its INxin technology. The Company became party to a multi-year CRADA relating to HUMxin when the HUMxin assets were acquired during 2007. Aggregate commitments total US$0.8 million over the term of the two CRADAs. During 2008, CRADA payments of US$0.2 million ($0.21 million) were made resulting in US$0.5 million ($0.61 million) of outstanding CRADA commitments remaining as at December 31, 2008. According to the CRADA terms, US$0.2 million is payable in 2009 and US$0.1M annually from 2010 to 2012.

49


h) Clinical trial programs

The Company has agreements with clinical sites, contract research organizations and other service providers related to the conduct of active clinical trials and programs. These commitments are performance based with payment subject to the achievement of clinical trial milestones and generally may be cancelled with written notice. At December 31, 2008, the Company has commitments to these third parties amounting to approximately $3 million.

15 Supplemental cash flow information

For the years ended December 31, 2008

$ 2007

$

Interest received 238,586 258,862 Interest paid 607 2,851

Non-cash financing activities Issuance of common shares for acquisition of intangible assets

(notes 7 and 11) - 104,840 Issuance of common shares for agent's corporate finance fee 67,600 -

Issuance of warrants as part of private placement commission 158,169 -

50

Directors

Frank Holler, MBA Chairman

Dr. Avtar Dhillon, MD Director

Dr. Jack Geltosky, PhD Director

Jim Heppell Director

Nitin Kaushal, CA Director

Dr. Fahar Merchant, PhD President, CEO & Director

Dr. James Miller, PhD Director

Management

Dr. Fahar Merchant, PhD President, CEO & Director

Dr. Samuel Denmeade, MD CSO

John Parkinson, CA Chief Financial Officer

Tom D’Orazio, MBA VP, Business Development and Strategy

Nina Merchant, MESc Sr. VP, Development and Regulatory Affairs

Shafique Fidai, PhD Sr. Director, Corporate Development

Corporate Offices

1210–885 West Georgia Street Vancouver, BC Canada V6C 3E8 T: 604.688.0199 F: 604.688.0173 [email protected] www.protoxtherapeutics.com

Auditors

PricewaterhouseCoopers LLP PricewaterhouseCoopers Place 250 Howe Street, Suite 700 Vancouver, BC Canada V6C 3S7

Legal Counsel

Fasken Martineau DuMoulin LLP 2900-550 Burrard Street Vancouver, BC Canada V6C 0A3

Transfer Agent

Computershare 510 Burrard Street – 3rd Floor Vancouver, BC Canada V6C 3B9

Investor Relations

Please direct inquiries and shareholder requests to: James Beesley Senior Director, Investor Relations T: 604.484.0975 [email protected]

Markets

The Company’s common shares are listed on the Toronto Stock Exchange (“TSX”) under the symbol “PRX”.

Annual Meeting

June 15, 2009 at Fasken Martineau DuMoulin LLP 2900–550 Burrard Street Vancouver, BC Canada V6C 0A3

Corporate Information

Design and production by Equicom, a TMX Group Company.

Protox Therapeutics Inc. 1210–885 West Georgia Street Vancouver, BC Canada V6C 3E8 www.protoxtherapeutics.com

Passion to care. Power to cure.