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Letter to Shareholders Dear Fellow Shareholders_ The three month

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Letter to Shareholders Dear Fellow Shareholders_ The three month Powered By Docstoc
					Letter to Shareholders
Dear Fellow Shareholders,
The three month period ending December 31, 2006 was an eventful one for Bioniche Life Sciences. We received an
authorization from the Canadian regulator that allows us to begin distribution of our E. coli O157:H7 cattle vaccine
to Canadian veterinarians; we initiated the first of two Phase III clinical trials using Urocidin in the treatment of non
muscle-invasive bladder cancer; we liquidated further non-core assets to support our Phase III bladder cancer
program; and we paid our long-term debt down substantially.


E. coli O157:H7 Cattle Vaccine

The Canadian Food Inspection Agency (CFIA), on December 22, 2006, provided authorization for distribution of
our E. coli O157:H7 cattle vaccine to Canadian veterinarians under a Permit to Release Veterinary Biologics (the
“Permit”) as specified in the Canadian Health of Animal Regulations. Under the Permit, no marketing activities can
be conducted, but we can respond to veterinarian orders for the vaccine. In order to progress from the Permit to a
full license in Canada, we must provide additional data confirming reduction in E. coli O157:H7 shedding by
vaccinated animals. We have completed an additional efficacy study at the University of Nebraska-Lincoln and the
data is currently being analysed to determine if it meets the efficacy requirements for a full license.

We continue to pursue the registration of the vaccine in the United States. The U.S. Department of Agriculture
(USDA), after reviewing data submitted to them in August, 2005, requested an additional efficacy trial be
conducted. As noted above, this study has been completed at the University Nebraska-Lincoln according to a
protocol approved by the USDA, and we expect to submit the data to the U.S. regulator later in 2007.
The Company has commenced internal scale-up of its manufacturing capacity at its Belleville, Ontario facility,
which is expected to put the Company in a position to supply at least part of the market requirements in the early
commercialization years. The Company is also exploring different manufacturing options related to meeting full-
scale production requirements. Depending upon demand for the E. coli O157:H7 vaccine, the Company may not be
able to fully supply the market without expanding its current manufacturing capabilities. Different options will
require varying amounts of capital expenditure, for which the Company is exploring various funding options.

There are an estimated 123 million cattle in North America alone. Approximately 25 million of these North
American cattle are conditioned in feedlots, the first target market for the Company’s vaccine. The current
vaccination protocol would be for each feedlot animal to receive three doses of the vaccine. Dairy cattle are an
additional target market, of which there are approximately 15 million animals in North America, although
vaccination protocols for dairy animals have not yet been finalized. Additionally, there are an estimated 62 million
cattle in Europe.

This vaccine – a Canadian technology – has been in development since 2000. Bioniche has invested more than $13
million to develop this sophisticated technology to its current stage.
More than 30,000 cattle have been vaccinated with our vaccine over the past four years, with studies consistently
showing a decrease in the number of cattle shedding these deadly bacteria in their manure and colonizing the
bacteria in their rectal junction.
Urocidin Phase III Program
We were pleased to announce – on November 8, 2006 – that the first patient has been treated in our Phase III
clinical trial with Urocidin. In this trial, 105 non muscle-invasive bladder cancer patients who are refractory
(unresponsive) to the current standard therapy (Bacillus Calmette-Guérin - BCG) will receive Urocidin in an open
label, North American study. A number of additional patients have been enrolled since the November
announcement.
The protocol for this trial has been granted “fast track” status by the U.S. Food and Drug Administration (FDA),
meaning that the results will receive expedited review by the FDA. A total of 25 centres have committed to
participate in this refractory study. The investigators include some of the most published and well-known North
American urologists involved in treating bladder cancer.
The FDA also approved a second Phase III trial with Urocidin in the treatment of patients with non muscle-invasive
bladder cancer who have received no previous treatment. This comparative, double-blind trial will involve
approximately 700 patients in North America and Europe and is expected to begin later this calendar year. We
expect this study to demonstrate that Urocidin is superior to BCG in terms of safety and is at least as efficacious.
We continue to spend a significant amount of time in discussions with major pharmaceutical companies about a
potential marketing partnership for Urocidin. A number of companies have expressed an interest in working with
Bioniche to market this technology, and we trust that a partnership can be successfully struck at the earliest
opportunity. Ferghana Partners, an international provider of high level, independent corporate financial advice to
firms in the biotechnology, pharmaceuticals, diagnostics and specialty chemicals industries, has been retained as
agent in this partnering transaction.

Paydown of Long-Term Debt

Subsequent to the quarter end, Laurus Master Funds exercised a share conversion of US$500,000 principal payment
on the term note. This has reduced the principal amount owing on the convertible term note to US$557,432. With
this payment on January 10, 2007, the Company will have reduced its total long-term debt to $2.2 million, inclusive
of capital leases, term notes and senior debt.

Outlook for Remainder of 2007

The Company has continued to experience a challenge in its financial condition and liquidity during the first half of
Fiscal 2007. Management expects operating losses to increase in Fiscal 2007 as we continue to enroll patients in our
first Phase III trial with Urocidin for bladder cancer.
Management is currently pursuing several financing alternatives with the support of the Board of Directors. These
alternatives include completing a partnership deal to support our Phase III development program for Urocidin;
raising preferred or common equity; and finding strategic financing partners to support the animal health business.
The Company continues to pursue our value creation objectives. The clear pathway to a Canadian license for our E.
coli O157:H7 cattle vaccine was indicative of value creation, in that we saw an increase in both share price and
volume of shares traded in the days and weeks following this announcement. A full Canadian license, when issued
by CFIA, should have similar positive results.
We have not yet seen our late stage bladder cancer therapy reflected in the market capitalization of the Company.
Management believes that its value will be recognized at such time as a marketing partnership deal is consummated
with a strategic pharmaceutical partner. The terms of such a deal will provide an external valuation of this cancer
therapy for the first time.
We appreciate your continuing support as we progress toward the completion of our priority projects.
Sincerely,




Graeme McRae
President & CEO




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MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
FROM OPERATIONS

For the Period Ending December 31, 2006

The following discussion and analysis is the responsibility of management and should be read in conjunction with
the accompanying unaudited interim consolidated financial statements and associated notes as at December 31,
2006, as well as the audited consolidated financial statements and Management’s Discussion and Analysis for the
year ended June 30, 2006. The Company’s unaudited consolidated interim financial statements have been prepared
in accordance with Canadian generally accepted accounting principles (“GAAP”) for interim financial statements.
This review was performed by management with information available as at February 1, 2007.

Forward-Looking Statements

The discussion in this report contains forward-looking statements that involve risks and uncertainties, such as,
statements of the Company’s plans, objectives, expectations, and intentions. The cautionary statements made in this
report should be read as applying to all related forward looking statements wherever they appear in this report. The
Company’s future results could differ materially from those discussed here. Factors that could cause or contribute to
these differences include those discussed in “Risks and Uncertainties”. All amounts are in Canadian dollars unless
otherwise indicated.

Overview

Bioniche Life Sciences Inc. is a research-based, technology-driven Canadian biopharmaceutical company that
develops, manufactures, and markets proprietary products for human and animal health markets worldwide. The
fully-integrated Company employs 185 people and has three operating business units (or segments): Human Health,
Animal Health, and Food Safety. Corporate headquarters are located in Belleville, Ontario, Canada. The Company’s
human health business unit has research and production facilities in Montréal, Québec, Canada. The animal health
business unit has product development and manufacturing facilities in Belleville, marketing and production facilities
in Athens, Georgia, USA; Pullman, Washington, USA; and Armidale, Australia; and a sales and marketing office
in Ireland.

The Company has several areas of strategic focus, including the development of effective therapies for bladder
cancer and other cancers; a cattle vaccine to help reduce E. coli O157:H7 contamination of food, water and the
environment; technologies to improve livestock reproduction; and technologies that could replace the use of
antibiotics in livestock. The Company’s existing animal health business is global in scope.

The Company has a three-fold strategy. First, it takes existing proprietary technologies and continues, through its
product development program, to enhance their proven therapeutic and prophylactic value for human and animal
use. Second, the Company works to develop these technologies to the point of commercialization, either alone or
with strategic marketing partners. Third, the Company manufactures as many products emerging from the product
development program as it can to increase profit margins, protect the integrity of its products, and enhance
shareholder value.

Highlights of the Quarter

    •   Total revenues reached $13.7 million after the first six months of Fiscal 2007 as compared to $12.2 million
        reported in the same period last year. This increase of $1.5 million, or 12%, resulted from a strong
        marketing effort by the Company’s Animal Health sales team and a better than expected response from
        customers to a sales initiative launched in August.

    •   On November 7, 2006, the shareholders of the Company approved the adoption of a Shareholder Rights
        Plan (the “Rights Plan”). The Rights Plan is designed to ensure, to the extent possible, that the Company’s
        shareholders are treated fairly in connection with potential take-over bids for its common shares. The
        Company believes that the Rights Plan preserves the fair treatment of shareholders, is generally consistent
        with Canadian corporate practice, and addresses institutional investor guidelines.

                                                                                                                   3
        •      On November 8, 2006, the Company announced that the first patient was administered UrocidinTM as part
               of the Phase III refractory bladder cancer trial. The study now underway uses the Company’s proprietary
               Mycobacterial Cell Wall-DNA Complex (MCC – trademarked Urocidin) for the treatment of non muscle-
               invasive bladder cancer in patients who are refractory (unresponsive) to Bacillus Calmette-Guérin (BCG),
               a live, attenuated strain of Mycobacterium bovis and the current standard therapy. BCG therapy can result
               in treatment limiting side effects in some patients.

        •      On December 8, 2006, the Company sold its remaining 10% ownership position in Bioniche Pharma
               Holdings Limited and its right to future royalty payments related to sales of Suplasyn®, for a total of $6.7
               million (US$6.0 million). As a result, the Company recorded a gain of $2.1 million on the sale of the
               Suplasyn® royalty. From the proceeds, the Company partially repaid its convertible term note with Laurus
               Master Funds (Laurus) in the amount of $2.6 million in cash and $0.2 million in shares for a total of $2.8
               million (US $2.5 million)

        •      On December 22, 2006, the Company announced that it would repay an additional $1.2 million (US$1.0
               million) of its debt with Laurus. The Company repaid $0.6 million on the convertible term note and $0.6
               million on the revolving note. Both payments were made in shares. Further details are presented under
               Liquidities and Cash Flow Statement Highlights.

        •      On December 22, 2006, the Company announced that it had received authorization from the Canadian
               Food Inspection Agency (CFIA) to distribute its E. coli O157:H7 cattle vaccine to Canadian veterinarians
               under a Permit to Release Veterinary Biologics as specified in the Canadian Health of Animal Regulations.
               This authorization equates to what is referred to as a “conditional license” in the U.S.

        •      Subsequent to the quarter end, on January 11, 2007, the Company announced that it would repay, through
               the issuance of shares, $0.6 million on the revolving note with Laurus, and that Laurus was converting $0.6
               million of the convertible term note into shares. Further details are presented under Liquidities and Cash
               Flow Statement Highlights.

Going Concern

The Company’s continuing losses, decreases in working capital and cash balances, and current burn rate1 have
resulted in a “going concern” uncertainty disclosure (refer to note 1). These consolidated financial statements have
been prepared in accordance with Canadian generally accepted accounting principles on a going concern basis,
which presumes that the Company will be able to realize its assets and discharge its liabilities in the normal course
of business for the foreseeable future. The Company’s committed cash obligations and expected expenditures for
the next 12 months exceed the funds available, including cash and cash equivalents.

In previous quarterly disclosures, the Company reported that it was pursuing several financing options to allow it to
execute its corporate objectives with the expectation that the current working capital would be consumed during the
fourth quarter of Fiscal 2007. The Company is performing according to its forecast. Meanwhile, the Company
continues to pursue financing alternatives including debt, preferred or common share issues, and finding strategic
partners to support its clinical programs and the animal health business. There is no assurance that these initiatives
will be completed as currently planned.

Highlights of Results of Operations

Human Health Business Unit (Bioniche Therapeutics Limited)

The Company’s human health business is operated through the business unit known as Bioniche Therapeutics
Limited. The unit develops novel and proprietary human cancer therapies. This business unit’s primary focus is on


1
    Burn rate means cash flow used in operations. For more information, please refer to the section, “Non-GAAP & Other Measures” below.




                                                                                                                                          4
the development of its proprietary Mycobacterial Cell Wall-DNA Complex (MCC) for the treatment of cancers.
This unit’s clinical development and research activities are in support of these commercialization efforts.

Gross research and development expenses for the human health business unit totaled $2.4 million for the three-
month period ending December 31, 2006, as compared to $2.1 million in the same period last year. On a year-to-
date basis, the Company expended $4.8 million for gross research and development, in this unit as compared to $3.9
million recorded in the same period last year.

Government incentives for the three-month period ending December 31, 2006 totaled $0.3 million, no change from
the same period last year. On a year-to-date basis, these incentives totaled $0.7 million, as compared to $0.4 million
reported in the same period last year.

Animal Health Business Unit

The Company’s animal health business unit develops, manufactures and markets animal health biopharmaceutical
products worldwide. Established in 1979 to develop technologies to replace antibiotics and improve reproductive
performance in livestock, management believes that the Company is now the largest Canadian-owned
biopharmaceutical animal health company. The Company’s animal health products are marketed directly in Canada,
the United States, Australia and Europe, and through selected distributors in the rest of the world.

Revenues recorded in this business unit for the three-month period ending December 31, 2006 totaled $5.8 million,
as compared to $6.1 million reported in the same period last year. On a year-to-date basis, revenues were $13.2
million, as compared to $11.8 recorded in the same period last year.

Expenses other than research and development incurred by this business unit in the three-month period ending
December 31, 2006 totaled $2.0 million, representing no change from the same period last year. On a year-to-date
basis, expenses other than research and development totaled $3.8 million, as compared to $4.1 million recorded in
the same period last year.

Gross research and development expenses incurred by this business unit in the three-month period ending December
31, 2006 totaled $0.4 million, as compared to $0.7 million in the same period last year. On a year-to-date basis,
gross research and development expenses were $0.8 million, as compared to $1.4 million recorded in the same
period last year.

Food Safety Business Unit

As a result of the Company’s expertise in the animal health field, it identified an opportunity to address the issue of
animal diseases that can pose health risks to humans via food, water and environmental transmission. To pursue this
opportunity, its food safety business unit was established in July, 2001. The development and commercialization of
an E. coli O157:H7 cattle vaccine (“E. coli vaccine”) has become the lead project in this unit. Beyond the E. coli
vaccine, the food safety business unit is also researching and developing other animal vaccines that improve the
safety of food and water supplies.

The E. coli vaccine is designed to reduce the burden of the pathogenic bacterium E. coli O157:H7 in cattle and their
manure, thereby reducing contamination into the environment, groundwater and in cattle processing plants. The
vaccine has also proven to reduce the number of animals in which the bacteria can colonize (reproduce). The fewer
bacteria reproducing in the cow, the fewer bacteria will be shed in its manure. In partnership with the Vaccine and
Infectious Disease Organization (VIDO) at the University of Saskatchewan, the Company is also researching other
products in the food and water safety field.

This business unit has no revenues. It incurred gross research and development expenses of $0.8 million for the
three-month period ending December 31, 2006, as compared to $0.3 million for the same period last year. On a
year-to-date basis, the unit incurred $1.5 million in gross research and development expenses, as compared to $0.7
million reported in the same period last year.
On December 22, 2006, the Company announced that it received authorization from the Canadian Food Inspection
Agency (CFIA) to distribute the E. coli O157:H7 cattle vaccine to Canadian veterinarians. CFIA is allowing

                                                                                                                     5
distribution of the vaccine under a Permit to Release Veterinary Biologics (“the Permit”) as specified in the
Canadian Health of Animal Regulations. This equates to what is considered a “conditional license” in the United
States.
Under the Permit, no marketing activities can be conducted by the Company but it can respond to veterinarian
orders for the E. coli O157:H7 vaccine. In order to progress from the Permit to a full license in Canada, the
Company must provide additional data confirming reduction in E. coli O157:H7 shedding by vaccinated animals.
The Company has completed an additional efficacy study at the University of Nebraska-Lincoln and the data is
currently being analysed to determine whether it meets the efficacy requirements for a full license.

The Company continues to pursue the registration of the vaccine in the United States. The U.S. Department of
Agriculture (USDA), after reviewing data submitted to them in August, 2005, requested an additional efficacy trial
be conducted. As noted, this study was completed at the University Nebraska-Lincoln according to a protocol
approved by the USDA, and the Company expects to submit the data to the USDA later in calendar year 2007.

The Company has commenced internal scale-up of its manufacturing capacity at its Belleville, Ontario facility,
which is expected to put the Company in a position to supply at least part of the market requirements in the early
commercialization years. The Company is also exploring different manufacturing options for meeting full-scale
production requirements. Depending upon demand for the E. coli O157:H7 vaccine, the Company may not be able
to fully supply the market without expanding its current manufacturing capabilities. Different options will require
varying amounts of capital expenditure, for which the Company is exploring various funding options.

                                               LAST EIGHT (8) QUARTERS CONSOLIDATED RESULTS AT A GLANCE
                                                                             2007                                   2006                                2005
                                                                      $             $           $           $              $           $           $           $


             (unaudited; expressed in millions of Canadian dollars)   Q2            Q1          Q4          Q3             Q2          Q1          Q4          Q3


Revenues                                                                    5.9          7.7         7.5         6.9            6.4         5.8         7.6        7.1
Income (loss) before research & development and other items                (1.8)         0.6        (2.3)       (0.4)          (0.9)       (0.9)        -       (0.7)
Loss from continuing operations                                            (2.9)        (2.7)       (5.9)       (3.5)          (6.1)       (3.7)       (3.3)    (3.8)
Income (loss) from discontinued operations                                  -                        7.9         9.3            0.4         0.4         0.6      0.5
Net Income (loss)                                                          (2.9)        (2.7)        2.0         5.8           (5.7)       (3.3)       (2.7)    (3.3)
Basic and fully diluted net income (loss) per share
       Continuing operations                                              (0.07)     (0.07)     (0.15)      (0.09)          (0.16)      (0.11)      (0.09)     (0.11)
       Discontinued operations                                                                   0.22        0.24              0.01        0.01        0.01    0.02
Total basic and fully diluted net income (loss) per share                 (0.07)     (0.07)      0.07        0.15           (0.15)      (0.10)      (0.08)     (0.09)



Results of Operations for the Three-Month Period Ending December 31, 2006

Consolidated Revenues

The Company’s revenues are now generated exclusively from product sales in its animal health business unit.
Consolidated revenues for the second quarter ending December 31, 2006 totaled $5.9 million, as compared to $6.4
million reported in the same period last year. This decrease of $0.5 million, or 8%, reflects the timing of sales for
two of the Company’s reproductive products, Folltropin®-V and Cue-Mate. As reported in the first quarter of the
fiscal year, a special marketing promotion was undertaken which resulted in increased sales during the first quarter.
The increased sales level is not expected to continue through the remainder of Fiscal 2007. Instead, management
expects that results for these products in the upcoming quarters will be more in line with the previous year’s sales.

Consolidated Cost of Goods Sold

Overall cost of goods in the animal health business unit totaled $2.7 million for the three-month period ending
December 31, 2006, as compared to $2.4 million reported in the same period last year. The overall gross profit
margin on product sales during the second quarter of fiscal 2007 decreased to 54% from 63% reported in the same
period last year. This decrease reflects inventory adjustments in one of the Company’s foreign affiliates.




                                                                                                                                                                         6
Consolidated Expenses Other than Research and Development

Expenses other than research and development totaled $5.0 million for the three-month period ending December 31,
2006, as compared to $4.8 million recorded in the same period last year. This increase of $0.2 million, or 4%,
represents the net of:

      •     $0.1 million decrease in interest on long-term debt due to the refinancing and repayment of the Company’s
            previous debt;
      •     $0.5 million decrease in foreign exchange loss as global currencies have remained somewhat stable during
            this quarter as compared to the same period last year;
      •     $0.2 million decrease in marketing and selling expenses due to a reduction in the overall number of
            products in order to focus on key branded products;
      •     $0.5 million increase in accreted interest on convertible term note resulting from continued redemptions of
            long-term debt; and
      •     $0.5 million increase in amortization of deferred financing fees related to the debt repayments during the
            second quarter.

Consolidated Research and Development

                                            GROSS RESEARCH & DEVELOPMENT
                                                  (expressed in millions of Canadian dollars)
 For the three and six months ended December 31                                      2006                                   2005
                                                                      Q2                        YTD          Q2                YTD
 Key Areas                                                            $                  $             %      $         $             %


 Animal Health                                                               0.4                0.9   13%         0.7        1.4     23%
 Food Safety                                                                 0.8                1.5   21%         0.3        0.7     12%
 Human Health                                                                2.4                4.8   65%         2.1        3.9     65%
 Research and Development, Gross                                             3.6                7.2   100%        3.1        6.0     100%




Gross research and development expenses for the three-month period ending December 31, 2006 totaled $3.6
million, as compared to $3.1 million reported in the same period last year. This increase of $0.5 million, or 16%,
reflects increased costs of $0.3 million within the human health business unit due to increased staffing in the clinical
group with the start of the Phase III clinical trial with Urocidin in the treatment of patients who are refractory to
BCG therapy, as well as third party costs associated with the Phase III clinical trial initiated in the second quarter of
Fiscal 2007. We anticipate third party costs associated with the Phase III clinical trial to increase in subsequent
quarters as the recruitment of additional patients progresses.

For the three-month period ending December 31, 2006, research and development expenditures increased by $0.5
million in the food safety business unit as compared to the same period last year. This reflects increased
expenditures associated with the ongoing field trials of the E. coli O157:H7 cattle vaccine. As a result of the
Company’s focus on the advancement of its Phase III bladder cancer program and its E. coli O157:H7 vaccine, the
Company reduced research and development expenses in the animal health business unit by $0.3 million.

Government incentives for the three-month period were stable at $0.4 million for both December 31, 2006, and the
same period in 2005.

Other Items (Consolidated)

During the three-month period ending December 31, 2006, the Company recorded a gain on the sale of its future
Suplasyn royalties of $2.1 million and a small loss on the sale of its remaining 10% ownership position in Bioniche
Pharma Holdings Limited. Cash proceeds totaled $6.7 million (US$6.0 million).

During the same three-month period last year, the Company recorded a one-time debt refinancing expense of $2.5
million related to Company’s debt restructuring.

                                                                                                                                            7
Consolidated Net Income (Loss)

Net loss from continuing operations for the three months ending December 31, 2006 totaled $(2.9) million, as
compared to $(6.1) million recorded in the same period last year. The decrease in the loss of $3.2 million reflects
the gain on the sale of future Suplasyn royalties of $2.1 million recorded in the three-month period ending
December 31, 2006, and an increase in other expenses. A one-time debt refinancing fee of $2.5 million was
recorded in the three-month period ending December 31, 2005. This has not recurred in the current quarter.

Results of Operations for the Six Months Ending December 31, 2006

Consolidated Revenue

Consolidated revenues for the six months ending December 31, 2006 totaled $13.7 million, as compared to $12.2
million reported in the same period last year. This increase of $1.5 million, or 12%, primarily reflects increased
sales for two of the Company’s reproductive products, Folltropin®-V and Cue-Mate. relating to promotional efforts
during the first quarter. The increased sales level is not expected to continue through the remainder of Fiscal 2007.
Instead, management expects that results for these products in the upcoming quarters will be more in line with the
previous year’s sales.

Consolidated Cost of Goods Sold

Overall cost of goods totaled $5.9 million for the six-month period ending December 31, 2006, as compared to $4.9
million reported in the same period last year. The overall gross profit margin on sales during the six-month period
ending December 31, 2006 decreased to 57% from 60% reported in the same period last year. This decrease of 3%
reflects inventory adjustments on one of the Company’s product lines.

Consolidated Expenses

Expenses totaled $8.8 million for the six month period ending December 31, 2006, as compared to $9.0 million
recorded in the same period last year. This decrease of $0.2 million, or 2%, represents the net of:

    •    $0.1 million decrease in marketing and selling expenses due to a reduction in the overall number of
         products in order to focus on key branded products;
    •    $0.5 million decrease in interest on long-term debt due to the Company’s ongoing reduction of long-term
         debt;
    •    $0.6 million increase in accreted interest on convertible term note resulting from continued redemptions of
         long-term debt;
    •    $0.6 million increase in amortization of deferred financing fees related to the debt repayments; and
    •    $0.8 million decrease in foreign exchange losses. As a result of repayments of US dollar denominated
         long-term debt, the Company has fewer US dollar-dominated liabilities, but has significant US dollar-
         dominated assets. The recent decline of the Canadian dollar relative to the US dollar has resulted in
         foreign exchange gains this year as compared to losses recorded last year.

Consolidated Research and Development
Gross research and development expenses for the six-month period ending December 31, 2006 totaled $7.2 million,
as compared to $6.0 million reported in the same period last year. This increase of $1.2 million, or 20%, reflects
increased costs of $0.9 million within the human health business unit due to increased staffing in the clinical group
with the start of the Phase III clinical trial with Urocidin in the treatment of patients who are refractory to BCG
therapy, as well as third party costs and increased administrative support costs associated with the Phase III clinical
trial.

Research and development expenditures also increased by $0.8 million in the food safety business unit. This reflects
increased expenditures associated with the ongoing field trials of the E. coli O157:H7 cattle vaccine. As a result of
the Company’s focus on the advancement of this vaccine and its Phase III bladder cancer program, the Company
reduced research and development expenses in the animal health business unit by $0.5 million.
                                                                                                                     8
Government incentives for the six-month period ending December 31, 2006 totaled $0.8 million, as compared to
$0.5 million reported in the same period last year. Incentives recorded last year were reduced by one-time
adjustments to the Technology Partnerships Canada (TPC) claims previously submitted.

Other Items (Consolidated)

On December 8, 2006, the Company realized a gain of $2.1 million related to the sale of its future Suplasyn®
royalties and a $0.2 million loss on its remaining 10% ownership position in Bioniche Pharma Holdings Limited.
Total proceeds received were $6.7 million (US$6.0 million).

Consolidated Net Income (Loss)

                                                              Calculation of EBITDA
                                                     (expressed in millions of Canadian dollars)
                                                                                                               2006                      2005
    For the three and six months ended December 31                                                      Q2            YTD          Q2           YTD
                                                                                                         $             $           $             $
    Loss before research and development and other items                                                     (1.8)         (1.1)       (0.9)         (1.7)
    Add (deduct):
     Amortization                                                                                             1.1           1.8         0.7          1.3
     Interest                                                                                                 0.4           0.6         0.5          1.1
     Accreted interest                                                                                        0.5           0.6         -            -
     Foreign exchange                                                                                        (0.3)         (0.3)        0.3          0.5
    *EBITDA before research and development and other items                                                  (0.1)          1.6         0.6          1.2

*EBITDA means earnings before interest, taxes, depreciation, and amortization. For more information, please refer to the section, "Non-
GAAP & Other Measures" below.

The EBITDA before research and development and other items for the six-month period ending December 31, 2006
totaled $1.7 million as compared to $1.2 million recorded in the same period last year, a gain of $0.5 million, or
42%.
Net loss from continuing operations for the six-month period ending December 31, 2006 reached $(5.7) million or
$(0.14) per share (basic and fully diluted) compared with $(9.7) million or $(0.27) per share for the previous year.

Balance Sheet Highlights

Assets

The Company’s current assets at December 31, 2006 were $14.7 million, as compared to $16.7 million reported at
June 30, 2006. The net working capital2, excluding deferred government incentives, was $6.0 million, as compared
to $ 6.8 million reported at June 30, 2006. Long-term assets at December 31, 2006 were $19.7 million, as compared
to $24.7 million reported at June 30, 2006.

Liabilities and Shareholders’ Equity

The Company’s current liabilities at December 31, 2006 were $12.2 million, as compared to $13.4 million reported
at June 30, 2006. Long-term debt at December 31, 2006 was $2.2 million, as compared to $4.7 million reported at
June 30, 2006. Total shareholders’ equity at December 31, 2006 was $20.0 million, as compared to $23.4 million
reported at June 30, 2006.

Liquidities and Cash Flow Statement Highlights

The Company’s cash used in operations was $3.3 million during the six-month period ending December 31, 2006,
as compared to cash used in operations of $5.5 million in the same period last year. This reflects the sale of the

2
    Working capital is a non-GAAP measure. For more information, please refer to “Non-GAAP & Other Measures”, below

                                                                                                                                                             9
Company’s 10% ownership position in Bioniche Pharma Holdings Limited and the sale of its future Suplasyn
royalties, along with increased sales and increased expenses.

The Company continues to experience challenges in its financial condition and liquidity. The Company has incurred
substantial operating losses since its inception, due primarily to its focus on research and development of
proprietary technologies. As at December 31, 2006, the Company had an accumulated deficit of $59.5 million.

Quarterly Variation Impacting the Capital Structure

During the second quarter of Fiscal 2007 and subsequently, the Company completed several significant transactions
that impacted its capital structure. These transactions are as follows:

    •    From October 1, 2006 to December 31, 2006, the Company issued shares in lieu of cash to repay a portion
         of its revolving loan with Laurus, totaling 1,329,000 shares with a value of $858,979;
    •    On December 8, 2006, the Company repaid US$200,000 in principal on the term note with Laurus through
         the issuance of 373,725 shares with a value of $229,804;
    •    On December 21, 2006, the Company repaid US$500,000 in principal on the term note with Laurus
         through the issuance of 860,633 shares with a value of $574,550; and
    •    On January 11, 2007, the Company repaid US$500,000 in principal on the term note with Laurus through
         the issue of 668,807 shares with a value of $668,121. These shares were issued at the fixed conversion
         price as stipulated in the loan agreement. This represents 7% of the debt, and will result in a reduction in
         the paid in capital value for the conversion option of $79,571. In addition, the Company repaid
         US$500,000 in principal on the revolving note with Laurus through the issue of 409,033 shares valued at
         $588,550.

These asset dispositions and debt conversions have enabled the Company to carry out its operations, including the
initiation of its Phase III clinical program in bladder cancer and the continuation of its studies to support registration
of the E. coli O157:H7 cattle vaccine while repaying $17.3 million in debt. By selling its interest in Bioniche
Pharma Group Limited, the Company also eliminated a further $33.1 million in total liabilities of that company
from its consolidated balance sheet.

Management expects operating losses to increase through Fiscal 2007 as the Company continues its Phase III trials
with Urocidin for bladder cancer under US Food and Drug Administration (FDA) approved protocols. The
Company’s committed cash obligations and expected expenditures for the next 12 months exceed the funds
available, including cash and cash equivalents.

As a result, the Company continues to pursue financing alternatives, including debt and preferred or common equity
issuances, to support present and future development activities. Further, the Company is actively seeking
collaborations to support the development of its advanced clinical program in bladder cancer and its E. coli
O157:H7 cattle vaccine, as well as finding strategic financing partners to support its animal health business. There is
no assurance that these initiatives will be completed as currently planned.

These consolidated financial statements have been prepared on a going concern basis, which presumes the Company
will continue to operate and will be able to realize its assets and discharge its liabilities and commitments in the
ordinary course of business for the foreseeable future. These consolidated financial statements do not include any
adjustments to the amounts and classifications of assets and liabilities should the Company not be able to continue
as a going concern.

The Company’s ability to continue as a going concern is dependent upon the continued support of its lenders,
suppliers, employees and customers, receiving funds through product licensing agreements or collaborative research
contracts, borrowing or equity financing, and achieving future profitable operations.

Outstanding Share Data

Common Shares


                                                                                                                      10
The Company has total common shares outstanding at February 1, 2007 of 43,568,448. In addition, the Company
has 4,470,000 outstanding warrants and 4,133,501 outstanding options, exchangeable for one common share upon
exercise. Also on February 1, 2007, the convertible term note with Laurus provides rights to exchange for an
approximate maximum of 734,570 common shares. The Series II preferred shares provide rights to exchange for a
maximum of 8,910,000 common shares.

The Company also has a commitment to issue warrants to TPC in connection with its agreements on the MCC and
E. coli O157:H7 projects. This commitment is triggered once the reimbursement exceeds 50% of the funding on
each program. During fiscal 2004 the threshold was triggered on the MCC project, and it has not yet been met on
the E. coli O157:H7 project. The parties are in ongoing negotiations to amend the agreements to substitute other
payment mechanisms for the obligation to issue warrants (see “Critical Accounting Estimates”).

Contractual Obligations

Contractual obligations have not changed significantly from the information reported in the June 30, 2006
MD&A.

Critical Accounting Estimates

The Company’s discussion and analysis of its financial condition and results of operations are based upon its
consolidated financial statements, which have been prepared in accordance with Canadian Generally Accepted
Accounting Principles (GAAP). The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. The Company’s critical accounting estimates are the same as reported
in the June 30, 2006 MD&A. On an ongoing basis, the Company evaluates its estimates, including cash
requirements, by assessing research and development activities and general and administrative requirements, market
need for its drug candidates, technological changes, the regulatory environment, pricing and sales expectations and
major business assumptions.

Non-GAAP & Other Measures

The following measures do not have a standardized meaning under Canadian Generally Accepted Accounting
Principles (GAAP) and, therefore, are unlikely to be comparable to similar measures presented by other companies:

    •   EBITDA: “Earnings Before Interest, Taxes, Depreciation, and Amortization”. The Company considers
        EBITDA to be an effective measure of each business unit’s contribution to the Company on an operational
        basis. It is management's view that this measure is used by analysts and shareholders to evaluate the
        Company's operations.
    •   Burn Rate: The Company interprets this term to mean cash flow used in operations. This information can
        be found in the Consolidated Statements of Cash Flows, under Operating Activities.
    •   Net Working Capital: current assets less current liabilities.

Risks and Uncertainties

Before making an investment decision with respect to the Company’s common shares, investors should carefully
consider the following risk factors, in addition to the other information and risks included in this report and the
annual information form and annual report for the year ending June 30, 2006. The primary risks that may affect the
Company’s business are summarized below. If any of the risks and uncertainties occurs, the business, financial
condition, prospects, and/or results of operations for the Company would likely suffer.

    •   Financing Requirements: The Company is dependent upon the future support of its lenders, suppliers,
        employees and customers. In addition, the Company will require additional financing to continue its
        operations through issuances of debt, common or preferred shares. There is uncertainty as to the
        availability of additional financial resources and whether, if available, they will be provided under
        acceptable conditions.


                                                                                                                 11
    •   Volatility of Share Prices: Company activity, including reports of new information, change in the
        Company’s financial situation, the sale of shares in the market, the Company’s failure to obtain results in
        line with the expectations of analysts, an announcement by the Company or any of its competitors
        concerning technological innovation may cause the Company’s share price to fall.

    •   Dependence on Collaborative Partners, Licensors and Others: the Company’s activities will require it to
        enter into various collaborative arrangements. There can be no assurance, however, that the Company will
        be able to establish such collaborations on favourable terms, if at all, or that its current or future
        collaborations will be successful.

    •   Clinical Trial Results: Clinical trials are long, expensive and uncertain processes and regulatory authorities
        may ultimately not approve any of the Company’s product candidates.

    •   Manufacturing Facilities: the Company relies on having properly validated, fully functioning
        manufacturing facilities of sufficient size in which to produce its products for market. Should systems fail,
        or a disaster strike, the ability to produce products would be negatively affected which, in turn, would
        affect revenue generation.

    •   Government Regulations: the manufacture and sale of animal and human therapeutic products is governed
        by numerous statutes and regulations in the United States, Canada, Europe, and other countries where the
        Company intends to market its products. There is no guarantee that the Company will be able to maintain
        compliance with all regulations as changes occur.

    •   Key Personnel: the Company’s success is dependent upon its ability to attract and retain a highly qualified
        work force, and to establish and maintain close relationships with research centres. Competition is intense
        and the Company’s success will depend, to a great extent, on its senior executives, scientific staff, and
        collaborators. The loss of key personnel could compromise the rhythm and success of product
        development.

    •   Currency Risk: the Company is exposed to currency risks as a result of the export of products
        manufactured in Canada and Europe, the majority of which are denominated in U.S. dollars.

    •   Intellectual Property must be protected to ensure the Company’s success. This will depend in part on its
        ability to obtain, maintain and enforce patent rights, maintain trade secrets and operate without infringing
        the proprietary rights of third parties. There is no assurance the Company’s patents will protect its
        technologies.

EFFECTIVENESS OF INTERNAL CONTROLS

The President and Chief Executive Officer and the Chief Financial Officer have reviewed the effectiveness of the
Company’s disclosure and internal controls and procedures as at December 31, 2006 and have concluded that the
Company’s controls and procedures provide reasonable assurance that material information relating to the
Company, including its consolidated subsidiaries, was made known to them and reported as required, particularly
during the period in which this report was being prepared. The Company has previously identified certain areas of
required improvement relating to the Company’s internal controls. Upon discovery of these deficiencies,
management took immediate action to remediate them. The Company is also improving its formal policies with
respect to reporting of unlawful activities. On an ongoing basis, management continues to analyze its controls and
procedures for potential areas of improvement.

Recent Accounting Pronouncements

    •   Changes in Accounting Policies and Estimates, and Errors: In July, 2006, the Accounting Standards
        Board issued a new section, “Changes in Accounting Policies and Estimates, and Errors”. This new
        standard impacts when an accounting policy may be changed, how any resulting changes are to be applied,
        and what disclosures must be made. Adoption is for fiscal years beginning on or after January 1, 2007. The


                                                                                                                  12
         Company has not yet determined the impact of the adoption of this standard on its consolidated results of
         operations or financial position. Adoption will not be required by the Company until Fiscal 2008.

    •    Hedges: In April, 2005, the Canadian Institute of Chartered Accountants (CICA) issued Section 3865 of
         the CICA Handbook, “Hedges”, which takes effect in fiscal years beginning on or after October 1, 2006.
         This section establishes standards for when and how hedge accounting may be applied. Hedging is an
         activity designed to modify an entity’s exposure to one or more risks. Hedge accounting modifies the
         normal basis for recognizing the gains, losses, revenues and expenses associated with a hedged item or a
         hedging item in an entity’s statement of operations. It ensures that the counterbalancing gains, losses,
         revenues and expenses are recognized in the same period. The Company has not determined the impact of
         this standard on its consolidated results of operations or financial position. Adoption will not be required
         until Fiscal 2008.

    •    Comprehensive Income: CICA 1530, “Comprehensive Income”, sets the standards for the reporting and
         display of comprehensive income. Comprehensive income is defined as the change in equity (net assets) of
         an enterprise during a period from transactions and other events and circumstances from non-owner
         sources. It includes all changes in equity during a period, except those resulting from investments by
         owners and distributions to owners. A statement of comprehensive income would be included in a full set
         of financial statements for both interim and annual periods. The new statement would present net income
         and each component to be recognized in other comprehensive income. These components would include,
         for example, exchange gains and losses arising on translation of the financial statements of selfsustaining
         foreign operations, which are currently included in a separate component of shareholders’ equity. This
         standard is effective for fiscal years beginning on or after October 1, 2006. The Company has not
         determined the impact of this standard on its consolidated results of operations or financial position.
         Adoption will not be required until Fiscal 2008

    •    Financial Instruments – Recognition and Measurement: In January, 2005, the CICA released
         Handbook Section 3855, “Financial Instruments – Recognition and Measurement”, effective for all annual
         and interim periods beginning on or after October 1, 2006. All financial instruments must be classified into
         prescribed categories and reclassification is rarely possible. Classification determines how each instrument
         is measured and how gains and losses are recognized. The Company has not yet determined the impact of
         the adoption of this standard on its consolidated results of operations or financial position. Entities are
         permitted a “fresh start” in applying the new standards for classification of financial assets and liabilities.
         Any adjustments to carrying amounts are recognized as adjustments to opening retained earnings or, in the
         case of assets classified as available for sale or amounts previously deferred in respect of cash flow hedges
         which will be redesignated as new cash flow hedges, to other comprehensive income.

Forward-Looking Statements

This discussion and analysis contains certain forward-looking statements that are subject to risks and uncertainties
that may cause the results or events predicted in this document to differ materially from actual results or events. No
assurance can be given that results, performance or achievement expressed in, or implied by, forward-looking
statements within this disclosure will occur or, if they do, that any benefit may be derived from them.

Other Information About the Company

Additional information relating to the Company, including the Annual Information Form (AIF), is available on
SEDAR at www.sedar.com.




Patrick Montpetit, CA

                                                                                                                    13
Vice-President, Finance and Chief Financial Officer
February 1, 2007



Bioniche Life Sciences Inc.
Amalgamated under the laws of Ontario


                            CONSOLIDATED BALANCE SHEETS
                                 [Unaudited - see note 1]

                                                      As at December 31,   As at June 30,
                                                                   2006             2006
                                                                     $                $

ASSETS
Current
Cash                                                           3,625,395       4,093,293
Accounts receivable                                            4,673,226       5,644,956
Inventories [note 2]                                           5,910,458       6,171,453
Prepaid expenses and deposits                                    540,719         804,470
                                                              14,749,798      16,714,172
Long-term
Property, plant and equipment                                  9,699,803      10,138,797
Intangible assets                                              8,973,475       9,401,733
Goodwill                                                         456,155         456,155
Deferred financing fees                                          448,978       1,258,236
Investment [note 7]                                                   —        3,298,279
Other assets                                                     100,000        100,000
                                                              34,428,209      41,367,372

LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Revolving credit facility                                      1,594,376       3,162,097
Accounts payable and accrued liabilities                       6,095,622       5,054,593
Income and other taxes payable                                   598,817         494,881
Deferred government incentives                                 3,485,824       3,433,007
Current portion of senior debt and capital leases                427,736       1,220,840
                                                              12,202,375      13,365,418
Long-term
Senior debt                                                    1,288,139       3,697,806
Obligations under capital lease [note 6]                         901,588         953,957
                                                              14,392,102      18,017,181
Shareholders' equity
Share capital [note 3]                                        74,796,457      72,686,901
Other paid-in capital [note 3]                                 4,763,206       4,556,290
Deficit                                                     (59,523,556)    (53,869,621)
Cumulative translation adjustment                                              (23,379)
                                                              20,036,107      23,350,191
                                                              34,428,209      41,367,372

See accompanying notes


                                                                                      14
Bioniche Life Sciences Inc.


                    CONSOLIDATED STATEMENTS OF DEFICIT
                            [Unaudited - see note 1]

For the three and six months ended December 31

                                                    Current       Last Year        Current            Last
                                                    Quarter        Quarter     Year to Date   Year to Date
                                                      2006             2005            2006           2005
                                                           $              $               $              $

Deficit, beginning of period                     (56,610,485)   (56,048,703)   (53,869,621)   (52,726,240)
Net loss for the period                           (2,913,071)    (5,682,210)    (5,653,935)    (9,004,673)
Deficit, end of period                           (59,523,556)   (61,730,913)   (59,523,556)   (61,730,913)

See accompanying notes




                                                                                                       15
Bioniche Life Sciences Inc.

                        CONSOLIDATED STATEMENTS OF LOSS
                               [Unaudited - see note 1]
For the three and six months ended December 31

                                                   Current      Last Year         Current             Last
                                                   Quarter       Quarter      Year to Date    Year to Date
                                                     2006            2005             2006            2005
                                                          $             $                $               $
                                                               [Restated -                      [Restated -
                                                               see note 5]                      see note 5]

REVENUE
Sales                                             5,912,276     6,371,623       13,656,902      12,209,677
Cost of sales                                     2,745,283     2,378,380        5,936,128       4,907,684
Gross profit                                      3,166,993     3,993,243        7,720,774       7,301,993

EXPENSES
Administration                                    1,442,452     1,418,054        2,572,743       2,424,639
Marketing and selling                             1,431,408     1,592,153        2,852,872       2,942,429
Quality assurance                                   169,539       268,992          338,046         517,896
Interest on long-term debt                          299,924       365,024          494,745         999,407
Other interest                                       71,527        98,663          144,731          75,597
Accreted interest on convertible term note          510,587        45,562          619,413          45,562
Share ownership plan and bonus                      212,661        99,944          212,661         233,115
Amortization of capital assets                      295,562       309,065          590,846         611,362
Amortization of intangible assets                   214,130       214,131          428,259         428,260
Amortization of deferred financing fees             634,930       176,362          809,258         244,701
Foreign exchange loss (gain)                      (271,665)       260,860        (283,851)         493,703
                                                  5,011,055     4,848,810        8,779,723       9,016,671
Loss before research and
  development and other items                    (1,844,062)    (855,567)      (1,058,949)     (1,714,678)

Research and development expenses, gross          3,561,692     3,126,982        7,151,440       5,985,334
Less: government incentives, net                  (413,907)     (392,035)        (836,534)       (483,234)
Impairment of investment [note 7]                        —             —           175,000              —
Loss on sale of investment [note 7]                  17,157            —            17,157              —
Gain on sale of annual Suplasyn royalty
    payments [note 7]                            (2,127,587)           —       (2,127,587)              —
Debt refinancing                                          —     2,493,920               —        2,493,920
Loss from continuing operations
  before income taxes                            (2,881,417)   (6,084,434)     (5,438,425)     (9,710,698)
Provision for income tax expense                      31,654         6,851         215,510          35,462
Loss from continuing operations                  (2,913,071)   (6,091,285)     (5,653,935)     (9,746,160)
Income from discontinued operations [note 5]              —        409,075              —          741,487
Net loss for the period                          (2,913,071)   (5,682,210)     (5,653,935)     (9,004,673)

Basic and diluted net income (loss) per share
 Continuing operations                                (0.07)         (0.16)          (0.14)         (0.27)
 Discontinued operations                                  —           0.01              —             0.02
Basic and diluted net loss per share                  (0.07)         (0.15)          (0.14)         (0.25)

See accompanying notes

                                                                                                       16
Bioniche Life Sciences Inc.

                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                            [Unaudited - see note 1]
For the three and six months ended December 31

                                                             Current      Last Year         Current             Last
                                                             Quarter       Quarter      Year to Date    Year to Date
                                                               2006            2005             2006            2005
                                                                    $              $               $                $
                                                                         [Restated –                      [Restated –
                                                                          see note 5]                      see note 5]
OPERATING ACTIVITIES
Loss from continuing operations                          (2,913,071)      (6,091,285)     (5,653,935)     (9,746,160)
Add (deduct) non cash items:
  Amortization                                               1,144,622       699,558        1,828,363       1,284,323
  Accreted interest on convertible term note                   510,587        45,562          619,413          45,562
  Foreign exchange gain                                        351,777       129,936          345,644         103,121
  Stock based compensation                                      55,242        37,534          111,022         110,709
  Share compensation                                            81,000        90,002           81,000          90,002
  Employee share ownership plan                                212,662       141,840          212,662         278,194
  Impairment of investment                                                                  175,000              
  Loss on investment                                            17,157                        17,157              
  Gain on sale of future Suplasyn royalty
       payments                                          (2,127,587)                     (2,127,587)              
  Debt refinancing                                                         1,271,454                      1,271,454
                                                         (2,667,611)      (3,675,399)     (4,391,261)     (6,562,795)
Net change in non-cash working capital balances              792,819          329,453       1,097,708       1,024,208
Cash used in operating activities                        (1,874,792)      (3,345,946)     (3,293,553)     (5,538,587)

INVESTING ACTIVITIES
Payment relating to acquisition of net assets                                                            (123,120)
Proceeds from sale of investment                             3,196,200                     3,196,200              
Proceeds from sale of annual Suplasyn royalty
    Payments                                                 3,652,800                     3,652,800              
Government incentives received
  on account of capital assets                                  30,224        53,730           30,224          53,730
Purchase of capital assets                                    (74,671)     (193,569)        (182,076)       (316,913)
Cash provided by (used in) investing activities              6,804,553     (139,839)        6,697,148       (386,303)

FINANCING ACTIVITIES
Proceeds from revolving credit facility                                    4,051,250                      4,051,250
Proceeds from term bridge loan                                             8,681,250                      8,681,250
Common shares issued                                                       1,053,693                      1,053,693
Proceeds from convertible term note                                        7,048,807                      7,048,807
Financing fees – debt                                                    (1,368,789)                    (1,368,789)
Proceeds on account of deferred
  government incentives                                       74,282          693,861          74,282         693,861
Proceeds (repayment) of revolving credit facility             12,113                       (653,367)             
Repayment of senior and other long-term debt             (2,982,467)     (16,038,627)     (3,292,408)    (16,246,731)
Cash provided by (used in) financing activities          (2,896,072)        4,121,445     (3,871,493)       3,913,341

Net increase (decrease) in cash from continuing operations   2,033,689       635,660        (467,898)     (2,011,549)
Net increase in cash from discontinued operations                           344,318                         779,762
Net increase (decrease) in cash for the period               2,033,689       979,978        (467,898)     (1,231,787)
Cash, beginning of period                                    1,591,706     1,315,643        4,093,293       3,527,408
Cash, end of period                                          3,625,395     2,295,621        3,625,395       2,295,621

See accompanying notes
                                                                                                                  17
Bioniche Life Sciences Inc.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006 and 2005 - Unaudited

1.     NATURE OF THE BUSINESS, BASIS OF PRESENTATION AND GOING
       CONCERN UNCERTAINTY
Bioniche Life Sciences Inc., [“the Company”], is a Canadian biopharmaceutical company engaged in the research,
development, manufacturing and commercializing of human and animal health products and technologies
worldwide. The Company's consolidated financial statements have been prepared in accordance with Canadian
generally accepted accounting principles. The Company’s common stock is traded on the Toronto Stock Exchange
[“TSX” symbol “BNC]”.

These interim financial statements do not contain all disclosures required by Canadian generally accepted
accounting principles for annual financial statements and, accordingly, these financial statements should be read in
conjunction with the most recently prepared annual financial statements for the year ended June 30, 2006. These
unaudited interim consolidated financial statements follow the same accounting policies and methods of their
application as outlined in the most recent annual consolidated financial statements.

The preparation of the consolidated financial statements requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting
periods. The reported amounts and note disclosures are determined using management’s best estimates based on
assumptions that reflect the most probable set of economic conditions and planned courses of action. Actual results,
however, may differ from the estimates used in these consolidated financial statements and such differences may be
material.

At December 31, 2006, the Company had incurred significant losses and had an accumulated deficit of $59,523,556.
The Company’s committed cash obligations and expected level of expenses for the next twelve months exceeds the
cash on hand. To date, the Company has financed its cash requirements primarily through issuances of shares and
debt, investment tax credits, sale of products, royalties, government grants, and a revolving credit facility. The
Company continues to pursue an alliance with a strategic partner to fund the development program for Urocidin,
and other financing initiatives including long-term debt financing and further equity issues The Company’s ability
to continue as a going concern is dependent on the successful conclusion of either of the above initiatives in the near
term and its ability to continue to sell its products at positive margins, to bring new products to market, obtain
regulatory approvals, achieve future profitable operations, to enter into other research collaborations and to obtain
additional financing. The outcome of these matters is dependent upon factors outside of the Company’s control. As
a result, there is significant uncertainty as to whether the Company will have the ability to continue as a going
concern.

These consolidated financial statements have been prepared in accordance with Canadian generally accepted
accounting principles on a going concern basis, which presumes the Company will continue in operations for the
foreseeable future and will be able to realize its assets and discharge its liabilities and commitments in the ordinary
course of business for the foreseeable future. These consolidated financial statements do not include any
adjustments to the amounts and classifications of assets and liabilities should the Company not be able to continue
as a going concern.




                                                                                                                      18
Bioniche Life Sciences Inc.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006 and 2005 - Unaudited


2.       INVENTORIES
                                                                           December 31, 2006        June 30, 2006
                                                                                                $               $

Raw materials                                                                        1,053,778          1,153,542
Work in process                                                                      1,866,220          2,225,261
Finished goods                                                                       2,990,460          2,792,650
                                                                                     5,910,458          6,171,453


3.       SHARE CAPITAL AND OTHER PAID-IN CAPITAL
Issued share capital consists of the following:
                                                                           December 31, 2006        June 30, 2006
                                                                                            $                  $

Preferred shares – Series I – 167                                                      161,000           161,000
Preferred shares – Series II – 12,000,000                                           11,731,716        11,731,716
Common shares – 42,450,857 [June 30, 2006 – 39,198,140]                             62,903,741        60,794,185
                                                                                    74,796,457        72,686,901

The change in issued and fully paid common shares of the Company during the six months ended December 31,
2006 are as follows:
                                                                                      December 31, 2006
                                                                                    Shares       Amount
                                                                                         #               $
Opening balance                                                                 39,198,140     60,794,185
Issued as a result of:
Employee share ownership plan [i]                                                  307,385        209,791
Share compensation [ii]                                                            115,262         81,000
Term debt repayment in shares [iii]                                              1,234,358        804,352
Principal repayments of revolving debt [iv]                                      1,595,712      1,014,413
Ending balance                                                                      42,450,857        62,903,741


[i]   Employee share ownership plan
      Following the approval of shareholders at the annual general meeting, shares available under this plan were
      increased to 4 million. The Company issued 253,053 shares in the second quarter [307,385 shares year to
      date] to bring the plan up to date, valued at $253,953 of which $44,162 remains to be issued and $41,291
      relates to the accrued balance at June 30, 2006 which was included in Other paid-in capital.




                                                                                                              19
Bioniche Life Sciences Inc.


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006 and 2005 - Unaudited


[ii]    Share compensation
        During the quarter ended December 31, 2006, the Company issued 5,264 shares valued at $4,001 [2006 –
        Nil] under the terms of employment agreements with sales representatives and 109,998 shares valued at
        $76,999 [2006 - $90,002] to directors in lieu of directors fees. The outstanding balance in Other paid-in
        capital represents the value of previous year bonuses for which the shares have not yet been issued.

[iii]   Term debt repayment in shares
        During the quarter ended December 31, 2006, senior long-term debt principal of $700,000 US was converted
        to 1,234,358 shares valued at $804,352.

[iv]    Revolving debt principal payments made in shares
        During the quarter ended December 31, 2006, the Company issued 1,329,000 common shares [1,595,712
        year to date] to Laurus Master Funds, Ltd. in lieu of cash principal repayments of revolving debt, valued at
        $858,979 [$1,014,413 year to date].

The weighted average common shares outstanding at December 31, 2006 were 39,759,475 [June 30, 2006 –
36,396,501]
Stock option plan
No options have been granted to date this year. During the quarter ended December 31, 2006, 25,000 options with
an exercise price of $2.80 expired. The fair value of options previously granted is expensed over the vesting period
of the options. The amount recognized as a compensation expense for the year to date was $111,022 [2006 -
$110,709].

Warrants
During the quarter ended December 31, 2006, five-year warrants to purchase 200,000 shares at $1.00 were granted
to Laurus Master Funds, Ltd. as described in note 7. The value determined using the Black-Scholes pricing model
assuming risk-free interest rate of 5.2%, expected dividend yield of 0%, expected volatility of 45% and expected
warrant life of five years, was $93,023.

The Company also has a commitment to issue warrants to TPC in connection with its agreements on the MCC and
E.coli O157:H7 projects. This commitment is triggered once the reimbursement exceeds 50% of the funding on
each program. During fiscal 2004 the threshold was triggered on the MCC project, but has not yet been met on the
E.coli O157:H7 project. The parties are in ongoing negotiations to amend the agreements to substitute other
payment mechanisms for the obligation to issue warrants.




                                                                                                                 20
Bioniche Life Sciences Inc.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006 and 2005 - Unaudited

      Other paid-in capital
Other paid-in capital consists of the following:
                                                                                December 31, 2006          June 30, 2006
                                                                                                      $                 $

Employee share ownership plan [i above]                                                        44,162              41,291
Stock options                                                                                 549,670             438,648
Share compensation [ii above]                                                                  19,889              19,889
Conversion option on convertible term note                                                  1,028,900           1,028,900
Warrants                                                                                    1,920,585           1,827,562
Accrued warrants                                                                            1,200,000           1,200,000
                                                                                            4,763,206           4,556,290


4.     SEGMENTED FINANCIAL INFORMATION
The Company’s three reportable segments or business units, Animal Health, Human Health and Food Safety, that
offer different products and require different technology and marketing strategies.

In its June 30, 2006 financial statements, the Company changed the composition of its reportable segments to
include a segment for corporate costs. The comparative segmented information for the quarter and six-month
period ended December 31, 2005 have been reclassified to reflect this change. These same periods have also been
restated to reflect the sale of Cystistat as a discontinued operation. [see note 5[b]].

The Company accounts for inter-segment sales on a cost plus basis.

                                                                   Current Quarter December 2006
                                                    Human         Animal      Food
                                                    Health        Health      Safety    Corporate            Total
                                                      $             $            $           $                $
 Sales                                               141,488     5,770,788         —             —        5,912,276
 Cost of sales                                            —      2,745,283         —             —        2,745,283
 Expenses                                                845     1,955,808         —      1,299,407       3,256,060
 EBITDA before research and
    development and other items                      140,643     1,069,697         —      (1,299,407)       (89,067)
 Research & development
    expenses, gross                                2,353,888      394,559      813,245           —        3,561,692
 Less: government incentives, net                   (293,808)          —     (120,099)           —         (413,907)
 Net research and development
    expenses                                       2,060,080      394,559     693,146            —        3,147,785
 Interest expense, net                                    —        22,285          —        859,753         882,038
 Amortization of capital assets
    and intangible assets                            271,579      200,839      16,585        20,689         509,692
 Amortization of deferred
    financing fees                                        —            —           —         634,930         634,930
 Impairment/loss on investment                            —            —           —          17,157          17,157
 Gain on sale of annual Suplasyn                                                          (2,127,587)     (2,127,587)
    royalty payments
 Foreign exchange gain                                    —            —           —       (271,665)       (271,665)
 Segment income (loss) before
    income taxes                                   (2,191,016)    452,014     (709,731)    (432,684)      (2,881,417)
 Inter-segment sales                                       —           —            —     3,425,573        3,425,573


                                                                                                                        21
Bioniche Life Sciences Inc.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006 and 2005 - Unaudited


                                                       Last Year Quarter December 2005 [Restated]
                                          Human            Animal        Food
                                          Health            Health      Safety     Corporate           Total
                                            $                 $           $            $                $
 Sales                                     235,640       6,135,983            —            —        6,371,623
 Cost of sales                                  —        2,378,380            —            —        2,378,380
 Expenses                                   78,077       2,029,425            —     1,271,641       3,379,143
 EBITDA before research and
    development and other items            157,563       1,728,178            —    (1,271,641)        614,100
 Research & development
    expenses, gross                      2,110,885         692,572      323,525           —         3,126,982
 Less: government incentives, net         (341,344)             —       (50,691)          —          (392,035)
 Net research and development
    expenses                             1,769,541         692,572      272,834           —         2,734,947
 Interest expense, net                          —           22,886           —       486,363          509,249
 Amortization of capital assets
    and intangible assets                  279,938         212,319        13,588      17,351          523,196
 Amortization of deferred
    financing fees                              —               —             —       176,362         176,362
 Debt refinancing                               —               —             —     2,493,920       2,493,920
 Foreign exchange loss                          —               —             —       260,860         260,860
 Segment income (loss) before
    income taxes                         (1,891,916)       800,401      (286,422) (4,706,497)       (6,084,434)
 Inter-segment sales                             —              —             —    3,262,984         3,262,984


                                                          Current Year to Date December 2006
                                          Human           Animal         Food
                                          Health           Health       Safety     Corporate           Total
                                            $                $             $           $                $
 Sales                                     490,719      13,166,183            —            —     13,656,902
 Cost of sales                                  —        5,936,128            —            —      5,936,128
 Expenses                                   12,406       3,801,858            —     2,162,058     5,976,322
 EBITDA before research and
    development and other items            478,313       3,428,197            —    (2,162,058)      1,744,452
 Research & development
    expenses, gross                      4,799,345         837,545     1,514,550          —         7,151,440
 Less: government incentives, net         (673,291)             —      (163,243)          —          (836,534)
 Net research and development
    expenses                             4,126,054         837,545     1,351,307           —        6,314,906
 Interest expense, net                          —           41,364            —     1,217,525       1,258,889
 Amortization of capital assets
    and intangible assets                  542,833         401,566        33,611      41,095        1,019,105
 Amortization of deferred
    financing fees                              —               —             —       809,258          809,258
 Impairment/loss on investment                  —               —             —       192,157          192,157
 Gain on sale of annual Suplasyn                                                   (2,127,587)      (2,127,587)
    royalty payments
 Foreign exchange gain                          —               —             —     (283,851)        (283,851)
 Segment income (loss) before
    income taxes                         (4,190,574)     2,147,722     (1,384,918) (2,010,655)      (5,438,425)
 Inter-segment sales                             —              —              —    7,308,142        7,308,142



                                                                                                                  22
Bioniche Life Sciences Inc.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006 and 2005 - Unaudited

                                                            Last Year to Date December 2005 [Restated]
                                                Human          Animal         Food
                                                Health          Health        Safety    Corporate            Total
                                                  $               $             $            $                $
 Sales                                          445,551      11,764,126           —            —          12,209,677
 Cost of sales                                       —        4,907,684           —            —           4,907,684
 Expenses                                       160,437       4,056,076           —     1,901,566          6,118,079
 EBITDA before research and
    development and other items                 285,114       2,800,366           —     (1,901,566)       1,183,914
 Research & development
    expenses, gross                            3,919,448      1,354,819       711,067          —          5,985,334
 Less: government incentives, net               (358,524)            —      (124,710)          —           (483,234)
 Net research and development
    expenses                                   3,560,924      1,354,819      586,357           —          5,502,100
 Interest expense, net                                —          47,582           —     1,072,984         1,120,566
 Amortization of capital assets
    and intangible assets                       559,851        430,190         13,961      35,620         1,039,622
 Amortization of deferred
    financing fees                                   —              —             —       244,701           244,701
 Debt refinancing                                    —              —             —     2,493,920         2,493,920
 Foreign exchange loss                               —              —             —       493,703           493,703
 Segment income (loss) before
    income taxes                              (3,835,661)      967,775       (600,318) (6,242,494)        (9,710,698)
 Inter-segment sales                                  —             —              —    5,933,059          5,933,059


5.       DISCONTINUED OPERATIONS
[a]    Sale of Bioniche Pharma Group
The Company’s Board of Directors resolved in May 2005 to dispose of the Bioniche Pharma segment of its
business comprised of manufacturing operations in Galway, Ireland and sales operations in Canada and the United
States. Accordingly, all revenues, expenses, assets and liabilities related to the Pharma segment were classified as
discontinued operations for 2005.

Income from discontinued operations
                                                                                          Last Year                 Last
                                                                                           Quarter          Year to Date
                                                                                               2005                 2005
                                                                                                      $                 $

Revenues                                                                                  5,389,537            10,886,587
Cost of sales                                                                             2,320,633             4,347,430
Gross profit                                                                              3,068,904             6,539,157
Expenses                                                                                  2,881,657             5,043,088
                                                                                            187,247             1,496,069
Net research and development expenses                                                     (350,731)             (717,248)
Interest, amortization and income taxes                                                       70,246            (596,069)
Non-controlling interest                                                                     (6,963)             (33,943)
Operating income (loss)                                                                   (100,201)               148,809




                                                                                                                        23
Bioniche Life Sciences Inc.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006 and 2005 - Unaudited


 [b] Sale of Cystistat®
On May 23, 2006, the Company closed the sale of its proprietary sodium hyaluronate product, Cystistat®, to
Bioniche Teoranta of County Galway, Ireland, for $10,000,000. Bioniche Teoranta is part of the New Bioniche
Pharma sold by Bioniche Life Sciences to RoundTable Healthcare Partners as outlined above. Accordingly, 2005
has been restated to classify of all revenues, expenses, assets and liabilities related to Cystistat as a discontinued
operations.

Income from discontinued operations
                                                                                         Last Year              Last
                                                                                          Quarter       Year to Date
                                                                                              2005              2005
                                                                                                  $                 $
                                                                                         [Restated]        [Restated]

Revenues                                                                                 1,050,426         1,526,346
Cost of sales                                                                              353,976           503,803
Gross profit                                                                               696,450         1,022,543
Expenses                                                                                   143,761           255,643
                                                                                           552,689           766,900
Net research and development expenses                                                     (43,413)         (174,222)
Operating income                                                                           509,276           592,678



Consolidated cash flow provided by (used in) discontinued operations:
                                                                                         Last Year              Last
                                                                                          Quarter       Year to Date
                                                                                              2005              2005
                                                                                                  $                 $
                                                                                         [Restated]        [Restated]

Operating activities                                                                      2,345,131         4,176,980
Investing activities                                                                    (1,435,424)       (2,100,435)
Financing activities                                                                      (410,331)         (837,334)
Effect of foreign currency translation                                                    (155,058)         (459,449)
Net increase in cash from discontinued operations                                           344,318           779,762


6.    RELATED PARTY TRANSACTIONS
During the first two quarters of fiscal 2007 and 2006, the Company made monthly lease payments of $16,667 per
month to a company controlled by the CEO who is also a Director of the Company.




                                                                                                                  24
Bioniche Life Sciences Inc.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2006 and 2005 - Unaudited


7.     IMPAIRMENT AND LOSS ON SALE OF INVESTMENT AND GAIN ON SALE
       OF ANNUAL SUPLASYN ROYALTY PAYMENTS
On December 6, 2006, the Company sold its 10% investment in Bioniche Pharma Holdings Limited (Pharma) for
US $2.8 million [$3,196,200]. The Company has retained its right to the earnout in Pharma. No amounts in respect
of the earnout have been recorded in the financial statements. The carrying amount of the investment had been
previously reduced by a $175,000 impairment charge to $3,123,279 in the quarter ended September 30, 2006 to
reflect the estimated selling price at that time. The net loss of $17,157 in the current quarter includes selling costs,
which include the fair value of warrants of $43,411 issued to the senior debt holder to release its collateral and other
fees of $46,667.

This sale also included the sale of the Company’s right to future Suplasyn royalty payments for US $3.2 million
[$3,652,800]. The gain of $2,127,587 recorded as a result of this sale is net of previously accrued royalties of
$1,422,268 of which $490,719 had been recorded during the six-month period ended December 31, 2006. Selling
costs, which include the fair value of warrants of $49,612 issued to the senior debt holder to release its collateral
and other fees of $53,333, amount to $102,945.

Upon closing, US $2.3 million [$2,667,770] of the proceeds were used to repay senior debt. In addition, 200,000
five-year warrants valued at $93,023, were issued to the senior debt holder and have been allocated as noted above.

As a result of the pre-payment of the Laurus term note, the Company has amortized the related debt discount,
deferred financing fees as well as recognizing the imputed interest on the convertible term note related to the equity
portion of the debt and accrued withholding tax on the debt discount.


8.     COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS
The comparative consolidated financial statements have been reclassified from statements previously presented to
conform to the presentation of the 2006 consolidated financial statements.


9.     SUBSEQUENT EVENTS
On January 10, 2007, the Company issued 409,033 shares valued at $588,550 [US $500,000] as principal payment
on the revolving credit facility, issued at the volume weighted average price for the 10 trading days up to the date of
issuance. On the same day, Laurus Master Funds, Ltd. exercised their conversion option for US $500,000 principal
on the term note, at the contract fixed conversion price, receiving 668,807 shares valued at $588,550. This
represents 7.14% of the debt, and will result in an allocation of the paid-in capital value of the conversion option of
$79,571 to common shares.

As a result of the term note conversion, the outstanding balance of the note at January 10, 2007 is US $557,432.




                                                                                                                      25

				
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