Edgar Filing: POLYDEX PHARMACEUTICALS LTD/BAHAMAS

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 2007

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-8366

POLYDEX PHARMACEUTICALS LIMITED

(Exact name of Registrant as specified in its charter)

Commonwealth of the Bahamas		None
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization		Identification Number)

421 Comstock Road

Toronto, Ontario, Canada

(Address of principal executive offices)

M1L 2H5.

(zip code)

Registrant’s telephone number, including area code (416) 755-2231

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

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

Common Stock, $0.0167 par value

(Title of Class)

Indicate by check mark whether the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Act.

Large Accelerated o FilerAccelerated o FilerNon-Accelerated Filer x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The aggregate market value of the Registrant’s voting common shares held by non-affiliates of the Registrant, based upon the $3.00 per share closing price of the Registrant’s common shares on January 31, 2007 was approximately $7,107,648. For purposes of this calculation, the Registrant’s directors, executive officers and holders of more than 10% of the Registrant’s common shares have been assumed to be affiliates.

The number of common shares of the Registrant outstanding as of April 27, 2007, was 3,072,846.

Portions of the Registrant’s Notice of Annual Meeting and Proxy Statement for the Registrant’s 2007 Annual Meeting of Members, scheduled to be held on July 6, 2007, are incorporated by reference into Part III of this Report.

Cautionary Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K contains various “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company’s expectations or beliefs concerning future events, including, but not limited to statements regarding the Company’s future growth, results of operations, liquidity and capital resources, expectations of regulatory approvals and the commencement of sales of products. The Company has tried to identify such forward-looking statements by use of words such as “believes,” “anticipates,” “intends,” “plans,” “will,” “should,” “expects” and similar expressions, but these words are not the exclusive means of identifying such statements. The Company cautions that these and similar statements in this Annual Report on Form 10-K and in previously filed periodic reports, including reports filed on Forms 10-K and 10-Q, are further qualified by various risks, uncertainties and other factors that could cause actual results to differ materially from those expressed in, or implied by, the forward-looking statements. These factors include, without limitation, changing market conditions, the progress of clinical trials and the results obtained, the establishment of new corporate alliances, the impact of competitive products and pricing, and the timely development, regulatory approval and market acceptance of the Company’s products, as well as the other risks discussed herein, none of which can be assured. The forward-looking statements contained herein speak only as to the date of this report. Except as otherwise required by federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements or the risk factors described in this Annual Report on Form 10-K, whether as a result of new information, future events, changed circumstances or any other reason after the date of this report.

PART I

ITEM 1. BUSINESS

Introduction

Polydex Pharmaceuticals Limited (the “Company”) is engaged in the research, development, manufacture and marketing of biotechnology-based products for the human pharmaceutical market, and also manufactures bulk pharmaceutical intermediates for the worldwide veterinary pharmaceutical industry. The Company focuses on the manufacture and sale of Dextran and derivative products, including Iron Dextran and Dextran Sulphate, and other specialty chemicals. Dextran, a generic name applied to certain synthetic compounds formed by bacterial growth on sucrose, is a polymer or giant molecule. The name Polydex combines the words “polymer” and “dextran.”

The Company was incorporated under the laws of the Commonwealth of the Bahamas on June 14, 1979 as Polydex Chemicals Limited, and changed its name on March 28, 1984.

The Company conducts its business operations through its two subsidiaries. The manufacture and sale of Dextran and derivative products is conducted through Dextran Products Limited, incorporated in Canada in 1966 (“Dextran Products”), and Chemdex Inc (“Chemdex”) which is incorporated in the state of Kansas, United States.

Products and Sales

Iron Dextran

Iron Dextran is a derivative of Dextran produced by complexing iron with Dextran. Iron Dextran is injected into most pigs at birth as a treatment for anemia. The Company sells Iron Dextran to independent distributors and wholesalers primarily in Europe, the United States and Canada, with less significant sales in Pacific Rim countries. Chemdex, Inc. has United States FDA approval for the manufacture and sale of Iron Dextran for veterinary use. On March 4, 2004, Sparhawk Laboratories Inc. (“Sparhawk”) and Chemdex entered into an exclusive Supply Agreement under which Sparhawk agreed to purchase 100% of its product needs for bulk Iron Dextran solution from Chemdex for a period of 10 years, and Chemdex agreed to sell such products in the United States exclusively to Sparhawk, subject to minimum purchase requirements.

Dextran Sulphate

Dextran Sulphate is a specialty chemical derivative of Dextran used in research applications by the pharmaceutical industry and other centers of chemical research. Dextran Sulphate manufactured by the Company is sold primarily to independent distributors and wholesalers in the United States as analytical chemical applications. This usage requires no regulatory approval.

Patents, Trademarks and Licenses

Cellulose Sulphate

During the fiscal year ended January 31, 1996, a patent for a new method of manufacture of Cellulose Sulphate was purchased for $1 million. The process was patented under U.S. patent number 5,378,828 in June 1995. Prior to development of the patented process, the manufacture of the compound required the use of dangerous and environmentally sensitive chemicals. The new method is safer and produces a more consistent product.

During fiscal year 2001, a patent bearing U.S. patent number 6,063,773 was issued to the Company and co-inventors entitled “Cellulose Sulphate for use as Antimicrobial and Contraceptive Agent”. Various clinical trials with respect to the safety and efficacy of this product have been completed or are in process, and further trials are planned by the Company.

During fiscal year 2006, a patent bearing European Patent No. 1296691 entitled “Cellulose Sulfate and Other Sulfated Polysaccharides to Prevent and Treat Papilloma Virus and Other Infections” was issued. This patent is effective in the following countries: France, Germany, United Kingdom, Austria, Belgium, Switzerland, Denmark, Spain, Finland, Greece, Ireland, Italy, Netherlands, Portugal, Sweden, Turkey and Hong Kong. This patent is directed to treating, inhibiting and preventing papilloma virus infections using sulfated polysaccharides.

Cystic Fibrosis

The Company is a party to a Research Agreement with the University of British Columbia, and a number of Canadian hospitals. Under the terms of this Research Agreement, the Company agreed to provide equipment and funding for continuing research on a low molecular weight dextran, initially studied for a cystic fibrosis treatment, in exchange for an exclusive worldwide license to manufacture, distribute and sell any products developed from the research. Two patents with respect to research products were issued by the United States in 1996. U.S. patent number 5,441,938 is held jointly by the University of British Columbia and the Company, and U.S. patent number 5,514,665 is held by the University of British Columbia and licensed to the Company. Rights to the low molecular weight dextran, were licensed to BCY LifeSciences, Inc. of Canada in 1999. Under this license agreement, BCY LifeSciences will pay a royalty to both the Company and the University of British Columbia based on sales and sublicensing revenue in return for the exclusive right to sublicense, manufacture, distribute and sell developed products. In February 2005, BCY LifeSciences sublicensed the low molecular weight dextran to ALIGN Pharmaceuticals, a private United States based company.

Iron Dextran

Effective February 1, 1995, the Company entered into an agreement with Novadex Corp., an affiliated company, under which Novadex granted the Company the exclusive worldwide license to use a certain process developed by Novadex for producing Iron Dextran. This process allows the Company to produce Iron Dextran at a lower cost than would otherwise be possible given the Company’s plant and equipment. The license agreement expires when the related patent expires in 2014. The Company pays a license fee based on production volumes. Upon the expiration of the license, the technology relating to the process described above will belong to the Company, with no further obligation to make royalty payments. During July 1999, Novadex was liquidated, and all of its assets and liabilities, including the above-referenced license agreement, were assumed by its sole shareholder, the former Vice Chairman of the Company, Thomas C. Usher, who passed away on February 26, 2005. The Company remains obligated under the license agreement to continue license fee payments.

Dextran Sulphate

The Company was granted U.S. patent number 4,855,410 in August 1989 with respect to Dextran Sulphate.

Suppliers

Dextran Products

In the manufacture of Dextran and Dextran derivative products, the Company uses two suppliers for its sugar raw material requirements. The Company also uses two suppliers for its iron requirements with respect to the manufacture of Iron Dextran. Both sugar and iron are readily available from numerous suppliers at competitive prices in the market.

The Company is dependent upon a single source for a certain raw material used in the production of Dextran Sulphate. Such supply was adequate in fiscal year 2007, and no shortages are anticipated in the near term. However, any curtailment in availability of such raw material could be accompanied by production or other delays as well as increased raw material costs, with consequent adverse effect on the Company’s results of operations. The Company has no long-term contracts with any of its suppliers.

Order Book and Seasonality

The Company’s order book as at January 31, 2007 was consistent with the orders on hand for January 31, 2006. All of these orders are expected to be filled within the current fiscal year. The Company’s bulk pharmaceutical intermediate business has become less seasonal with the sale of the Vet Labs business in Kansas City to Sparhawk in March 2004. The bulk product sold by Dextran Products is primarily targeted to the swine industry where modern animal husbandry techniques maintain most animals indoors. Certain producers in less developed countries may raise animals outdoors thereby reducing the amount of product required but such markets are small and decreasing in size as they modernize. Therefore the Company does not believe that such seasonality is material to its financial results as a whole. The Company’s sale of Dextran Sulphate is not subject to seasonality.

Competition

The Company is the only Canadian manufacturer of Iron Dextran. On March 4, 2004, the Company sold its finished product veterinary pharmaceutical business to its former joint venture partner, Sparhawk. In connection with the sale, Sparhawk and Chemdex entered into an exclusive Supply Agreement under which Sparhawk agreed to purchase 100% of its product needs for bulk Iron Dextran solution from Chemdex for a period of 10 years, and Chemdex agreed to sell such products in the United States exclusively to Sparhawk, subject to minimum purchase requirements.

The only other major supplier of Iron Dextran is located in Denmark, although there exist several smaller European and Chinese sources of Iron Dextran. Dextran Sulphate is manufactured by several manufacturers in the United States and Europe. With regard to Iron Dextran and Dextran Sulphate, the Company competes on the basis of quality, service and price.

The technology in the field of Dextran and its derivatives is undergoing continuous expansion and development. The manufacture of Dextran and its derivatives may be achieved by different processes and variations (including by means of a process known as glycoside, which is in the public domain). Therefore, the Company does not believe that its licensed, patented process for the production of Iron Dextran gives it any substantial competitive advantage.

Environmental Compliance

The Company believes that it is in substantial compliance with all existing applicable foreign, federal, state and local environmental laws and does not anticipate that such compliance will have a material effect on its future capital expenditures, earnings or competitive position.

Employees

As of March 31, 2007, the Company employed 24 employees, of whom 15 were engaged in production, 6 in quality control, 2 in administration and 1 in marketing and sales activities. None of the Company’s employees is covered by collective bargaining agreements. Management considers its relations with employees to be good.

Research and Development

During the fiscal years ended January 31, 2007, 2006 and 2005, the Company expended $214,865, $215,482 and $127,847 respectively, on research and development, primarily relating to the development of Cellulose Sulphate. Research and development expenditures are a result of additional product development activities performed by the Company and funded outside of its partnership relationships. During the fiscal years ended January 31, 2006 and 2005, the Company recognized investment tax credit benefits of $9,681 and $13,105 respectively.

Cellulose Sulphate (Ushercell)

Ushercell, is a high molecular weight Cellulose Sulphate envisioned for topical vaginal use primarily in the prevention and transmission of AIDS and other sexually transmitted diseases, as well as unplanned pregnancies.

Up to January 31, 2007, research and development with respect to the Company’s Cellulose Sulphate product was being conducted with the assistance and financial support of CONRAD, formerly known as the Contraceptive Research and Development Program, with funding from various private and public sector sources. CONRAD provided direct financial assistance in support of, and/or actually conducted specific research studies involving the Cellulose Sulphate product in conjunction with various public health-oriented entities, such as Family Health International, USAID (The United States Agency for International Development), the World Health Organization, the Centers for Disease Control and the HIV Prevention Trials Network, and many other universities, research centers and philanthropic organizations.

During fiscal year 2007 several clinical trials were conducted, ongoing and commenced.

In particular:

•	A study to determine the effectiveness of Cellulose Sulphate gel as a treatment for Bacterial Vaginosis, a common disorder among reproductive-age women, was undertaken at the University of Campinas, in San Paolo, Brazil. The trial is complete and a report on findings is expected in fiscal 2008.

•

Two Phase III clinical trials to assess the effect of Ushercell on vaginal HIV acquisition were started in six clinical trial sites located in India and Africa. These trials were being conducted by CONRAD, in collaboration with Family Health International with financial support from USAID and the Bill and Melinda Gates Foundation. The Phase III trials had staggered commencement dates in October 2004 and May 2005. On January 31, 2007, the Independent Review Board in conjunction with CONRAD, WHO, FHI and Polydex announced the halting of the trials due to a possible higher than expected incidence of HIV. An investigation is now underway to determine the cause, with a report due towards the end of fiscal year 2008.

Cystic Fibrosis

Cystic fibrosis is a genetic disease, which causes a cascade of effects, the most severe being a build up of mucus in the lungs. This mucus is difficult to remove and also permits the colonization of bacteria, which then cause secondary infections and often death. Research relating to cystic fibrosis has shown that a special form of Dextran, named by the Company as Usherdex 4, is effective in preventing the colonization of bacteria in the mouth and in stimulating the macrophages in the lungs to remove the bacteria present and lessen secondary infections.

As noted above, in 1999, the Company’s cystic fibrosis product was licensed to BCY LifeSciences. In November 2003 BCY LifeSciences announced its completion of the analysis of a Phase II clinical trial of the product designed to assess the efficacy and safety of the product on pulmonary function in adult cystic fibrosis patients. The results indicated that the product (known as DCF 987) was well tolerated and may have shown positive trends in the improvement of FEV₁ (forced expiratory volume in one second), a measure of lung function, and the reduction of Pseudomonas aeruginosa bacterial load in patient sputum. BCY LifeSciences was also granted a patent entitled “Use of Dextran and Other Polysaccharides to Improve Mucus Clearance” by the European Patent Office. The Company will receive royalty payments based upon sales and other revenues upon approval of any developed product pursuant to its license agreement with BCY LifeSciences. In February of 2005, BCY LifeSciences entered into a development agreement with Align Pharmaceuticals to fund ongoing studies on the compound.

Segmented Information

The information regarding the geographic distribution of revenue and revenue by significant customer is set forth in Note 16 to the Company’s Consolidated Financial Statements for the fiscal year ended January 31, 2007 under Item 8 Financial Statements and Supplementary Data.

ITEM 1A. RISK FACTORS

The risks, uncertainties and other factors described below could materially and adversely affect the Company’s business, financial condition, operating results and prospects.

The Company’s product development efforts may be reduced or discontinued due to difficulties or delays in clinical trials.

To achieve sustained profitability, the Company must, alone or with corporate partners and collaborators, successfully research, develop and commercialize identified technologies or product candidates. Current developmental product candidates are in various stages of clinical and pre-clinical development and will require significant further funding, research, development, preclinical and/or clinical testing, regulatory approval and commercialization testing, and are subject to the risks of failure inherent in the development of products based on innovative or novel technologies. These products are also rigorously regulated by the U.S. federal government, particularly the FDA, and by comparable agencies in state and local jurisdictions and in foreign countries. Specifically, each of the following results is possible with respect to any one of the Company’s developmental product candidates:

•

that the Company will not be able to maintain its current research and development schedules;

•

that the Company will not be able to enter into human clinical trials because of scientific, governmental or financial reasons, or that it will encounter problems in clinical trials that will cause a delay or suspension of the development of the product candidate as, for example, recently occurred when the Independent Review Board and CONRAD suspended two Phase III clinical trials of Ushercell pending an investigation;

•

that the developmental product will be found to be ineffective or unsafe;

•

that government regulations will delay or prevent the product’s marketing for a considerable period of time and impose costly procedures upon the Company’s activities;

•

that the FDA or other regulatory agencies will not approve the product or the process by which the product is manufactured, or will not do so on a timely basis; and/or

•

that the FDA’s policies may change and additional government regulations and policies may be instituted, which could prevent or delay regulatory approval of the product.

If any of the risks set forth above occurs, the Company may not be able to successfully develop its identified developmental product candidates.

The Company’s developmental product commercialization efforts may not be successful.

It is possible that, for reasons including, but not limited to those set forth below, the Company may be unable to commercialize or receive royalties from the sale of any given developmental product, even if it is shown to be effective, if:

•

the product is uneconomical or if the market for the product does not develop or diminishes;

•

the Company is not able to enter into arrangements or collaborations to commercialize and/or market the product;

•

the product is not eligible for third-party reimbursement from government or private insurers;

•

others hold proprietary rights that preclude the Company from commercializing the product;

•

others have brought to market similar or superior products;

•

others have superior resources to market similar products or technologies;

•

government regulation imposes limitations on the indicated uses of the product, or later discovery of previously unknown problems with the product results in added restrictions on the product or results in the product being withdrawn from the market; and/or

•

the product has undesirable or unintended side effects that prevent or limit its commercial use.

The Company depends on partnerships with third parties for the development and commercialization of its products.

The Company’s strategy for development and commercialization of its products is to rely on licensing agreements with third party partners. As a result, the ability of the Company to commercialize future products is dependent upon the success of third parties in performing clinical trials, obtaining regulatory approvals, manufacturing and successfully marketing its products. There can be no assurance that such third party collaborations will be successful. If any of the Company’s current research and development partnerships are discontinued, it may not be able to find others to develop and commercialize its current product candidates.

The Company does not currently have agreements with third parties to market its developmental products.

The commercialization of any of the Company’s developmental products that receive FDA approval will depend upon the Company’s ability to enter into agreements with companies that have sales and marketing capabilities. The Company currently intends to sell its products in the United States and internationally in collaboration with one or more marketing partners. The Company may not be able to enter into any such collaboration to market its developmental products in a timely manner or on commercially reasonable terms, if at all.

The Company may be unable to commercialize its products if it is unable to protect its proprietary rights, and may be liable for significant costs and damages if it faces a claim of intellectual property infringement by a third party.

The Company’s success depends in part on its ability to obtain and maintain patents, protect trade secrets and operate without infringing upon the proprietary rights of others. In the absence of patent and trade secret protection, competitors may adversely affect the Company’s business by independently developing and marketing substantially equivalent or superior products, possibly at lower prices. The Company could also incur substantial costs in litigation and suffer diversion of attention of technical and management personnel if it is required to defend intellectual property infringement suits brought by third parties, with or without merit, or if required to initiate litigation against others to protect or assert intellectual property rights. Moreover, any such litigation may not be resolved in favor of the Company.

The Company has received various patents covering the uses of its developmental products. However, the patent position of companies in the pharmaceutical industry generally involves complex legal and factual questions, and recently has been the subject of much litigation. Any patents the Company has obtained, or may obtain in the future, may be challenged, invalidated or circumvented. To date, no consistent policy has been developed by the United States Patent and Trademark Office regarding the breadth of claims allowed in biotechnology patents.

In addition, because patent applications in the United States are maintained in secrecy until patents issue, and because publication of discoveries in scientific or patent literature often lags behind actual discoveries, the Company cannot be certain that it and its licensors are the first creators of inventions covered by any licensed patent applications or patents or that the Company or such licensors are the first to file. The United States Patent and Trademark Office may commence interference proceedings involving patents or patent applications, in which the question of first inventorship is contested. Accordingly, the patents owned by or licensed to the Company may not be valid or may not afford the Company protection against competitors with similar intellectual property.

It is also possible that the Company’s patents may infringe on patents or other rights owned by others, licenses to which may not be available to the Company. The Company may have to alter its products or processes, pay licensing fees or cease certain activities altogether because of patent rights of third parties.

In addition to the products for which the Company has patents or has filed patent applications, the Company relies upon unpatented proprietary technology and may not be able to meaningfully protect its rights with regard to that unpatented proprietary technology.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

The Company’s wholly-owned subsidiary, Dextran Products Limited, maintains its executive and sales offices and its manufacturing plant of approximately 30,000 square feet in Toronto, Ontario, Canada.

The Company owns and operates a fermentation plant in Toronto, Ontario, Canada. This plant has the capacity to simultaneously produce both 10% and 20% Iron Dextran at the rate of up to 11,000 liters per week (there are 1.057 quarts in one liter), and 500 kilograms (there are 2.2 pounds in one kilogram) per month of Dextran Sulphate. Current production is approximately 10,000 liters of Iron Dextran per week and approximately 250 kilos of Dextran Sulphate per quarter.

During fiscal year 2007, management determined that expansion of the Company’s facility and modernization of its powder-producing equipment in Toronto should both increase production capacity and also improve quality for a significant portion of the Company’s powdered products. The Company therefore embarked upon a major plant refurbishment project that included the purchase and installation of more modern drying equipment with increased throughput. Engineers prepared drawings and permits were issued, allowing construction of a new drying facility to begin in the fourth quarter of fiscal year 2007. The actual drying equipment is now being installed and construction is expected to be completed in the second quarter of fiscal year 2008. It is expected that improved quality of the finished product will result in new markets becoming available.

ITEM 3. LEGAL PROCEEDINGS

There are no pending legal proceedings to which the Company or any of its subsidiaries is a party, or to which any of their property is subject.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the Company’s fourth fiscal quarter ended January 31, 2007.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The principal market for the Company’s common shares is the NASDAQ Capital Market. The Company’s common shares trade under the symbol “POLXF.”

The reported high and low closing prices of the Company’s common shares as reported on the NASDAQ Capital Market for each full quarterly period within the two most recent fiscal years of the Company were as follows:

Fiscal Year 2007 fiscal quarter ended:	High		Low
April 30, 2006	$	10.43		7.03
July 31, 2006		10.50		8.55
October 31, 2006		9.30		6.81
January 31, 2007		8.00		2.61

Fiscal Year 2006 fiscal quarter ended:	High		Low
April 30, 2005	$	7.25		4.26
July 31, 2005		6.05		4.25
October 31, 2005		5.94		4.38
January 31, 2006		9.45		5.50

The quotations set out above represent the prices for the specific dates between dealers and do not include retail mark-up, markdown or commission. They do not represent actual transactions.

As of April 27, 2007 there were approximately 346 holders of record of the Company’s common shares.

The Company has paid no dividends in the past and does not consider likely the payment of any dividends in the foreseeable future.

The Company did not sell any unregistered common shares during its 2007 fiscal year and does not currently have a plan to repurchase any of its common shares.

ITEM 6. SELECTED FINANCIAL DATA

The following selected historical consolidated financial and other data are qualified by reference to, and should be read in conjunction with, the consolidated financial statements and notes thereto included elsewhere in this report. The Company’s consolidated financial statements are prepared in accordance with United States generally accepted accounting principles. All amounts are in United States dollars.

	Fiscal year ended January 31,
	2007			2006			2005		2004			2003
Sales from continuing operations		6,499,287			5,265,209			6,372,359		14,092,189			12,786,343
Net income (loss) from continuing operations		(260,623	)		(1,489,053	)		1,139,911		(5,999	)		(673,741	)
Net income (loss) per common share		(0.09	)		(0.49	)		0.38		—			(0.22	)
Total assets		10,127,298			9,910,445			10,811,873		10,510,513			9,712,574
Long-term borrowings		1,058,835			691,178			833,631		1,013,701			1,188,603

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company’s fiscal year ends on January 31^stof each year. In this report, fiscal year 2007 refers to the Company’s fiscal year ended January 31, 2007. The following discussion should be read in conjunction with the financial statements and notes thereto included elsewhere in this report. The Company’s financial statements are prepared in accordance with United States generally accepted accounting principles. All amounts are in United States dollars, unless otherwise denoted. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. For a discussion of risks, uncertainties and other factors that could cause actual results to differ materially from those expressed in, or implied by the forward-looking statements, see the discussion of Risk Factors above and “Cautionary Note Regarding Forward-Looking Statements” above.

Overview

The Company is engaged in the research, development, manufacture and marketing of biotechnology-based products for the human pharmaceutical market, and also manufactures bulk pharmaceutical intermediates for the worldwide veterinary pharmaceutical industry. The Company conducts its business operations through its subsidiaries: Dextran Products and Chemdex.

Dextran Products Business

The manufacture and sale of bulk quantities of Dextran and derivative products for sale to large pharmaceutical companies throughout the world is conducted through a Canadian subsidiary, Dextran Products.

In fiscal year 2008, management intends to continue its focus on the core business of Dextran Products that have historically been the backbone of the Company. Opportunities to increase distribution chains for existing Dextran products in certain overseas markets, such as India, China and Russia, are being explored by management. New customers have also been identified in Europe. Expanding current market opportunities and the potential for new market penetration has led management to make plant refurbishments and the expansion of production capacity a priority for fiscal year 2008 with respect to Dextran Products operations. The first step has been installation of new drying equipment to produce increased quantities of higher quality product. These products have traditionally generated higher margins.

Research and development of the Company’s human pharmaceutical products is also coordinated at the Dextran Products facility.

Ushercell, is a high molecular weight Cellulose Sulphate that was envisioned for topical vaginal use primarily in the prevention of unplanned pregnancies, as well as the transmission of AIDS and other sexually transmitted diseases. On January 31, 2007, the Company announced that trials, originally intended to evaluate various aspects of the use of Cellulose Sulphate as a contraceptive gel with antiviral capabilities, were being halted due to a possible increase in transmission of HIV. Announcements were prepared and distributed in conjunction with CONRAD and other agencies which were involved with the trials. A full investigation is now underway as to the potential cause and to determine exactly what occurred. The final report is expected towards the end of fiscal year 2008. Until the report is available, it is impossible to plan future developments of this product for any of the indications that have been identified to date. The Company never received any financial gain from this project, and as a result, there is no immediate or direct effect on sales or revenues.

Chemdex, Vet Labs and the Joint Venture Business

During approximately one month of the 2005 fiscal year, the Company also engaged in the finished product veterinary pharmaceutical business through its United States subsidiary Chemdex, which, in turn, conducted its operations through its subsidiary, Vet Labs. On December 1, 1992, Vet Labs and Sparhawk Laboratories Inc. entered into a Joint Venture for the purpose of manufacturing and selling veterinary pharmaceutical products. On January 13, 2004, the Company, Chemdex and Vet Labs entered into an Asset Purchase Agreement with Sparhawk pursuant to which the Company agreed to sell its finished product veterinary pharmaceutical business, including substantially all of the assets of Vet Labs and its ownership interest in the Joint Venture, to Sparhawk for $5,500,000 in cash. The sale was completed on March 4, 2004. Simultaneously with the closing, Chemdex advanced $350,000 to Sparhawk in exchange for an unsecured subordinated promissory note bearing interest at 13% per annum and a warrant to purchase 4% of the equity of Sparhawk. The promissory note was payable in full on March 4, 2009. Interest was payable annually, but could be deferred and added to the principal balance of the promissory note each year at Sparhawk’s discretion. On May 31, 2006, payment in full for principal and interest was received. The warrant expired at the earlier of payment in full of the promissory note or March 4, 2014, and therefore expired before it could be exercised. Chemdex also entered into a supply agreement with Sparhawk to supply ferric hydroxide and hydrogenated dextran solution to Sparhawk on an exclusive basis in the United States for 10 years.

Management considered the finished goods veterinary pharmaceuticals industry to be a highly competitive, mature industry, and believed that meaningful growth in this industry would require significant investment in new product development. The Company’s investment in this industry through the Joint Venture required the sharing of profits with its partner. Management believed that the Company could expect to obtain a higher return on investment by focusing on its current Dextran Products business and on human pharmaceutical research and development projects. The sale of this business segment resulted in a significant reduction in consolidated sales and gross profits during fiscal year 2006.

Results of Operations

Fiscal Year ended January 31, 2007 compared to Fiscal Year ended January 31, 2006 compared to Fiscal Year ended January 31, 2005

									Fiscal Years
	FY 2007			FY 2006			FY 2005		07 v 06			06 v 05
									(% increase (decrease)
Net income (loss) before taxes	$	(375,818	)	$	(1,308,296	)	$	1,706,777		71	%		(177	)%
Net income (loss)		(260,623	)		(1,489,053	)		1,139,911		83	%		(231	)%
Earnings (loss) per share		(0.09	)		(0.49	)		0.38

The improvement in net loss for the fiscal year 2007 as compared to fiscal year 2006 is due to several factors, including the increase in sales and gross margins, the decrease in expenses, and the recognition of the deferred gain on the promissory note related to the sale of the veterinary products assets to Sparhawk (Note 12). These gains were partially offset by the poor margins in the fourth quarter of fiscal 2007, and the continued increase in value of the Canadian dollar relative to the United States dollar, which negatively affected gross margins at Dextran Products, because the majority of its revenue is denominated in United States dollars while the majority of its cost of sales is denominated in Canadian dollars. Therefore, when the value of the Canadian dollar increases in relation to the United States dollar, margins decrease.

The fiscal year 2006 net loss is primarily due to the decrease in gross margin at Dextran Products, which was primarily a result of the continued increase in value of the Canadian dollar relative to the United States dollar, as well as increased research and development costs.

The United States dollar continued to decline in value relative to the Canadian dollar during fiscal year 2007. Exchange rate fluctuations resulted in a 4% decrease in margins at Dextran Products in fiscal year 2007 compared to the previous fiscal year (6% decrease in fiscal year 2006 compared to fiscal 2005).

							Fiscal Years
	FY 2007		FY 2006		FY 2005		07 v 06			06 v 05
							(% increase (decrease))
Sales	$	6,499,287	$	5,265,209	$	6,372,359		23	%		(17	)%

Sales increased in fiscal year 2007 primarily as a result of increased demand from existing customers, accompanied by price increases that were implemented in the third quarter. Total production in fiscal 2007 increased by 10% compared to fiscal 2006.

The decrease in sales during fiscal year 2006 is due primarily to the fact that the fiscal year 2005 included one month of sales in the Vet Labs joint venture, while fiscal year 2006 only includes raw materials sales to Sparhawk.

										Fiscal Years
	FY 2007			FY 2006			FY 2005			07 v 06			06 v 05
										(% increase (decrease))
Gross profit	$	832,443		$	429,185		$	1,516,418			94	%		(72	)%
Percentage of sales		13	%		8	%		24	%

The increase in gross profit in fiscal year 2007 is a result of the increase in sales due to price increases and customer demand noted above, combined with ongoing control of direct costs by management. Management continues to be concerned about the increasing cost and utilization of utilities, and is hopeful that cost savings will result from the new equipment being implemented as part of the plant refurbishment. Overall margins were negatively impacted during the fourth quarter of fiscal 2007 due to unusually large sales of lower margin products to some major customers, combined with unexpected increases in equipment repairs and utility costs.

The decline in gross profit in fiscal year 2006 resulted from the increased cost of sales, which was exacerbated by the continued increase in value of the Canadian dollar compared to the United States dollar.

							Fiscal Years
	FY 2007		FY 2006		FY 2005		07 v 06			06 v 05
							(% increase (decrease))
Selling, promotion, general and
Administrative expenses	$	1,376,960	$	1,550,735	$	1,594,580		(11	)%		(3	)%

In fiscal year 2007, management continued its efforts to reduce overall selling, promotion and general and administrative expenses. While cost reductions were realized in the majority of general and administrative areas, the most notable reductions occurred in outside professional and reporting fees, insurance, and directors’ expenses, though options expense was higher than in fiscal 2006. Offsetting these cost savings was an increase in selling and promotion expenses. During fiscal 2007, the Company attended several functions relating to the cellulose sulphate project. Missions to Microbicides 2006 in South Africa as well as visits to India to source production partners were also undertaken. Some sponsorship was funded at Microbicides 2006 as well as at the large Toronto AIDS conference during the summer. The Company expects a significant reduction in these costs for fiscal 2008.

In fiscal year 2006, overall selling, promotion and general and administrative expenses remained consistent with fiscal year 2005. During fiscal year 2006, administrative expenses decreased slightly for Dextran Products, although this was offset by the continuing rise in the Canadian dollar. General and administrative expenses for Chemdex decreased in fiscal year 2006 due primarily to the one month of operations included in fiscal year 2005

									Fiscal Years
Research and development	FY 2007		FY 2006			FY 2005			07 v 06			06 v 05
									(% increase (decrease)
Research and development
Expenditures	$	214,865	$	215,482		$	127,847			—			68	%
Investment tax credits		—		(9,681	)		(13,105	)		(100	)%		(26	)%
Net research and development expense	$	214,865	$	205,801		$	114,742			4	%		79	%

In fiscal year 2007, the Company’s research and development expenditures were consistent with the level of expenditures in fiscal year 2006. In fiscal year 2007, the majority of expenses were relatively evenly split between patent work, and consultants working on production process improvements, with some funds allocated to the bacterial vaginosis trial. Almost all work has been halted on the project since the Independent Review Board overseeing the Phase III Clinical Trials discovered some inconsistent results and halted those trials. It is expected that their report will be available later this year at which point a decision can be made on further activities. Therefore for fiscal year 2008, it is expected that research and development expenditures will be reduced. In fiscal years 2006 and 2005, the majority of expenses related to the clinical trial on bacterial vaginosis.

Funding for the Company’s primary development products is provided directly by third party public and/or private sector groups to the entities carrying out such research. The Company does not take possession or control over these funds. The Company benefits from the results of research projects through the ownership of patents and/or licenses with respect to the products involved. The Company has no commitments to repay the funding or to purchase the results of the research.

							Fiscal Years
	FY 2007		FY 2006		FY 2005		07 v 06			06 v 05
							(% increase (decrease))
Depreciation and amortization expense	$	547,297	$	543,023	$	513,095		1	%		6	%

The increase in depreciation and amortization in fiscal year 2007 and 2006 is due primarily to the increased investments in capital equipment during the year, and the increase in the value of the Canadian dollar relative to the United States dollar. Included in the depreciation and amortization expense above are allocations to cost of goods sold in the amount of $505,111 for fiscal year 2007 (2006 - $481,863; 2005 - $468,212).

							Fiscal Years
	FY 2007		FY 2006		FY 2005		07 v 06			06 v 05
							(% increase (decrease))
Interest expense	$	94,790	$	81,509	$	91,210		16	%		(11	)%

The increase in interest expense in fiscal year 2007 is primarily attributable to the interest on the capital equipment loan obtained in March 2006, as well as the rise in the Canadian dollar relative to the United States dollar. This is partially offset by the decrease in other long-term debt and capital lease obligations.

In fiscal year 2006, the decrease in interest expense relative to the prior fiscal year was primarily attributable to a decrease in long-term debt and capital lease obligations, as well as the associated decrease in imputed interest due to the continuing repayment of non-interest bearing long-term debt.

							Fiscal Years
	FY 2007		FY 2006		FY 2005		07 v 06			06 v 05
							(% increase (decrease))
Foreign exchange gain	$	22,857	$	18,139	$	46,172		26	%		(61	)%

In fiscal year 2007, the increase in the foreign exchange gain was due primarily to Dextran Products’ fluctuating exposure to the United States dollar throughout the fiscal year, combined with the continued increase in value of the Canadian dollar relative to the United States dollar. Dextran Products also realized a foreign exchange gain in fiscal year 2006 because the Canadian dollar increased in value relative to the United States dollar. Throughout fiscal years 2006 and 2007, Dextran Products generally had a net liability exposure to the United States dollar because intercompany payables denominated in United States dollars normally exceeded its United States dollar denominated accounts receivable balances.

							Fiscal Years
	FY 2007		FY 2006		FY 2005		07 v 06			06 v 05
							(% increase (decrease))
Interest and other income	$	497,663	$	148,166	$	130,131		236	%		14	%

The increase in interest and other income in fiscal year 2007 is due primarily to the recognition of the deferred gain of $350,000 on the promissory note from Sparhawk as explained above, as well as investment gains during the year.

In fiscal year 2006, the Company earned interest income of $148,166 from the investment of the proceeds from the sale of Vet Labs assets.

								Fiscal Years
	FY 2007			FY 2006		FY 2005		07 v 06			06 v 05
								(% increase (decrease))
Tax provision (recovery)	$	(115,195	)	$	180,757	$	566,866		(163	)%		(68	)%

The fiscal year 2007 decrease in tax provision is due to a decrease in deferred tax liabilities of $69,140, combined with a reduction in the current tax liability of $46,055. The decrease in the deferred tax liability is due to the decrease in the timing difference related to the excess of carrying value of depreciable assets over tax value, which in turn reduces future income tax liabilities. The decrease in the current tax liability is necessary because no tax liabilities are expected.

The fiscal year 2006 decrease in tax provision was a result of the valuation allowance taken against deferred tax assets due to the degree of uncertainty relating to the future recoverability of tax losses and unused research and development expenditures incurred by the Company. The Company also incurred United States non-resident tax on interest payments made from Chemdex to Polydex. There was also a tax recovery due to a reduction in the valuation allowance on a deferred tax item realized during the year at Chemdex during fiscal 2006.

Liquidity and Capital Resources

As of January 31, 2007, the Company had cash and cash equivalents of $1,384,995, compared to $971,451 at January 31, 2006. In fiscal year 2007, the Company generated cash of $661,607 in its operating activities, compared to expending $425,185 for fiscal year 2006 and $310,351 for fiscal year 2005. The decrease in cash generated from operations in fiscal year 2006 as compared to fiscal year 2005 is because of the decrease in earnings. Depreciation and amortization continues to be a large non-cash expense of the Company, which is expected to increase in fiscal 2008 as result of assets acquired as part of the refurbishment become operational.

Working capital improved to $2,375,436, but the current ratio declined to 2.50 to 1 as of January 31, 2007, compared to $2,190,321 and 2.76 to 1 as of January 31, 2006.

Management expects the primary source of its future capital needs will be a combination of existing cash and cash equivalent reserves generated from the sale of the Vet Labs assets, Company earnings and borrowings. As at January 31, 2007, the Company had commitments of $545,488 for capital expenditures related to the plant refurbishment at Dextran Products in Toronto, and $53,542 for other commitments.

The Company believes that based upon the current levels of revenues and spending, its existing working capital resources will be sufficient to support continuing operations for the foreseeable future.

At January 31, 2007, the Company had accounts receivable of $1,139,186 and inventory of $1,338,857, compared to $744,720 and $1,549,544, respectively, at January 31, 2006. The increase in accounts receivable at January 31, 2007 is due to the timing of payments and the large volume of sales in the fourth quarter compared to fiscal 2006. At January 31, 2007, the Company had accounts payable of $1,213,518, compared to $574,270 at January 31, 2006. The increase as at January 31, 2007 was due primarily to the timing of supplier payments as well as costs related to the plant refurbishment in the fourth quarter. During fiscal year 2007, capital expenditures totaled $1,724,440, as compared to $418,246 in fiscal year 2006. The majority of the capital expenditures were for production equipment at the Dextran Products plant in Toronto in both these fiscal years. Management intends to complete its current plant refurbishment and expansion plan in the second quarter of fiscal year 2008.

During fiscal year 2007, the Company continued to decrease its investment in medium-term, investment-grade, debt securities, while maintaining investments in fixed income mutual funds, and diversified royalty and income trust units, all denominated in Canadian dollars. The remaining medium-term debt security has a maturity of June 7, 2007. Unrealized gains and losses will occur as the market interest rate varies. Management does not expect significant gains or losses in the future due to the relatively short term to maturity of the debt and the nature of the trust unit and mutual funds. Management plans to hold this debt to maturity unless such funds are needed for working capital or other cash needs such as the plant refurbishments.

The change in accumulated other comprehensive income of the Company is almost entirely attributable to the currency translation adjustment of Dextran Products. Dextran Products’ functional currency is the Canadian dollar. This currency translation adjustment arises from the translation of Dextran Products’ financial statements to United States dollars.

Dextran Products has a Cdn. $750,000 (U.S. $636,000) (2006 - Cdn. $1,1250,000; U.S. $1,097,000) line of credit, of which none was utilized at January 31, 2007 and 2006. This line of credit bears interest at the Canadian banks’ prime lending rate plus 0.75% (2007 - 6.00%; 2006 - 5.25%) and is repayable on demand. This indebtedness is collateralized by a general security agreement over the Company’s assets and a collateral mortgage of Cdn. $500,000 on the Dextran Products building in Toronto. In March of 2006, the Company secured an additional Cdn $500,000 fixed rate term loan primarily to fund capital purchases, with interest at 0.75% over Canadian banks’ prime lending rate (2007 - 6.95%).

The decrease in capital lease obligations during fiscal year 2007 was due to repayments on capital leases. The majority of the capital lease obligations were repaid during fiscal year 2007. The Company entered into one new capital lease obligation at Dextran Products during fiscal year 2005, for a piece of office equipment. Capital lease obligations are due over the next three years.

No changes in accounting principles or their application have been implemented in the reporting period that would have a material effect on reported income.

Changes in the relative values of the Canadian dollar and the United States dollar occur from time to time and may, in certain instances, materially affect the Company’s results of operations.

The Company does not believe that the impact of inflation and changing prices has had a material effect on its operations or financial results at any time in the last three years.

Related Party Transactions

In August 1997, the Company loaned Thomas C. Usher, formerly its Vice-Chairman, Director of Research and Development, a member of its Board of Directors and the beneficial owner of greater than 5% of the outstanding common shares of the Company, $691,500 at an interest rate equal to the United States’ bank prime rate plus 1.50% (the “Loan”). The Loan was used to partially fund a $1,000,000 payment to the State of Florida in order to allow Thomas C. Usher to regain possession of 430,000 Common Shares of the Company then held by the State as collateral security relating to the liquidation of insurance companies formerly owned by Thomas C. Usher. Repayment of the Loan is accomplished by periodic payments and through offsets by the Company against royalty payments due Thomas C. Usher pursuant to intellectual property license agreements and, in the past, bonus payments, if any, granted Thomas C. Usher as an employee of the Company. The amount outstanding under the Loan as of January 31, 2007 was $306,827, as compared to $323,972 at January 31, 2006, including accrued interest. The Company has taken a cumulative provision of $323,490 against accrued interest on this loan at January 31, 2007, compared to a cumulative provision of $292,860 at January 31, 2006. Thomas C. Usher passed away on February 26, 2005. Obligations with respect to the Loan transferred to the estate of Thomas C. Usher. The Company continues to be obligated to make royalty payments pursuant to the license agreements, and intends to continue to offset such payments against the Loan.

In August 1999, Thomas C. Usher personally assumed all of the assets and liabilities of Novadex Corp., including the balance of receivables (the “Receivables”) due to the Company from Novadex Corp. The Receivables have no specific repayment terms. The total outstanding amount of the Receivables as of January 31, 2007 was $130,619, as compared to $207,599 at January 31, 2006. Thomas C. Usher also owed $250,000 to a subsidiary of the Company, Novadex International Limited, as of January 31, 2007, pursuant to a non-interest bearing loan with no specific repayment terms. The outstanding amount of this loan has not changed from January 31, 2006. The amounts continue to remain owing from the estate of Thomas C. Usher.

Thomas C. Usher had pledged 302,409 common shares of the Company as security for these amounts owing to the Company. These common shares had a market value of $907,227 at January 31, 2007, based on the closing price of the Company’s common shares on the NASDAQ Capital Market on January 31, 2007. The Company intends to continue to hold the pledged assets as collateral until the amounts owing discussed above are repaid.

The Company had a commitment to pay an amount equal to one year’s salary, $110,000, to Thomas C. Usher’s estate. The amount owing on this commitment as at January 31, 2007 is $39,519 (2006 - $51,816).

The Company also has an outstanding loan payable to Ruth Usher, a member of the Board of Directors until her retirement on October 31, 2003, the beneficial owner of greater than 5% of the outstanding common shares of the Company, a former director, and the widow of Thomas C. Usher. The amount due from the Company pursuant to this loan increased to $679,309 at January 31, 2007 from $675,919 at January 31, 2006 due to interest charges exceeding monthly payments by the Company. The Company is required to make blended monthly payments of $6,000 (2006 - $5,000).

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Tabular Disclosure of Contractual Obligations

As of January 31, 2007, future minimum cash payments due under contractual obligations, including, among others, the Dextran Products line of credit, the loan payable to Ruth Usher, and capital lease agreements, are as follows:

	Payment due by period
			Less than						More than
Contractual Obligations	Total		1 year		1-3 years		3-5 years		5 years
Long-term debt obligations (1)	$	1,233,705	$	132,370	$	264,729	$	261,883	$	574,723
Capital lease obligations (2)		18,345		6,115		12,230		—		—
Operating lease obligations (3)		3,822		546		1,092		1,092		1,092
Purchase obligations		599,030		599,030		—		—		—
Revolving loans (4)		—		—		—		—		—
Total	$	1,854,902	$	738,061	$	278,051	$	262,975	$	575,815

1.	Consists of:

(a)

Note payable in quarterly payments of Cdn. $419 maturing September 2010; and

(b)

Amounts due to shareholder which bear interest at the Canadian banks’ prime lending rate plus 1.5%, with required minimum monthly payments, including interest, of $6,000.

(c)

Equipment purchase term loan of Cdn $476,351 (US $403,961) repayable to a Canadian bank in monthly payments of Cdn $5,792 including interest at 6.95%, maturing May 2011.

2.	Consists of capital lease obligations for office equipment of Cdn. $18,027 (US $15,287) repayable in quarterly installments, bearing interest at 10.4% and maturing December 2009.

3.	Consists of operating lease obligations for office equipment requiring quarterly payments of Cdn. $161 (US $141) terminating June 2006

4.	Consists of Canadian operating line of credit bearing interest at the Canadian banks’ prime lending rate plus 0.75%, repayable upon demand.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, applied on a consistent basis. The critical accounting policies include the use of estimates of allowance for doubtful accounts, the useful lives of assets and the realizability of deferred tax assets. The Company’s accounting policies with respect to the Joint Venture and its disposition are also discussed below.

Management is required to make estimates and assumptions, in preparing the consolidated financial statements, that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the periods. The actual results could differ from these estimates. Significant estimates made by management include the calculation of reserves for uncollectible accounts, inventory allowances, useful lives of long-lived assets and the realizability of deferred tax assets.

Revenue Recognition

All revenue is from sales of bulk and finished dosage manufactured products and is recognized when title and risk of ownership of products pass to the customer. Title and risk of ownership pass to the customer pursuant to the applicable sales contract, either upon shipment of product or upon receipt by the customer. Since returns are rare and generally not accepted, management has not made provision for returns. In addition, product sold in bulk quantities is tested, prior to release for shipment, to ensure that it meets customer specifications, and in many cases, customers receive samples for their own testing. Approval is obtained from the customer prior to shipping.

Allowance for Doubtful Accounts

Accounts receivable is stated net of allowances for doubtful accounts. Allowances for doubtful accounts are determined by each reporting unit on a specific item basis. Management reviews the credit worthiness of individual customers and past payment history to determine the allowance for doubtful accounts. Since the majority of sales at Dextran Products are export, Dextran Products maintains credit insurance through a crown corporation, which is supported by the Canadian government, for the majority of its customers receivables. There has been no allowance for doubtful accounts during the past three years.

Long-Lived Assets

Long-lived assets are stated at cost, less accumulated depreciation or amortization computed using the straight-line method based on their estimated useful lives ranging from three to fifteen years. Useful life is the period over which the asset is expected to contribute to the Company’s cash flows. A significant change in estimated useful lives could have a material impact on the results of operations. The Company reviews the recoverability of its long-lived assets, including buildings, equipment and other intangible assets, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the Company’s ability to recover the carrying value of the asset from the expected future pre-tax cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. The measurement of impairment requires management to make estimates of these cash flows related to long-lived assets as well as other fair value determinations.

Deferred Tax Assets

The Company has recorded a valuation allowance on deferred tax assets where there is uncertainty as to the ultimate realization of the future tax deduction. Dextran Products has incurred capital losses, which are only deductible against capital gains. It is not certain that Dextran Products will realize capital gains in the future to use these Canadian capital loss deductions.

The Joint Venture

In 1992, Vet Labs and Sparhawk entered into the Joint Venture for the manufacture and sale of veterinary pharmaceutical products. Vet Labs and Sparhawk each owned 50% of the Joint Venture during its operation. The Joint Venture was governed by the Agreement for the Operation of Veterinary Laboratories, Inc.’s Lenexa Facility and Sparhawk Lab of KC as a Joint Venture, dated December 1, 1992, by and among Sparhawk, Chemdex and Vet Labs (the “Joint Venture Agreement”).

Pursuant to the Joint Venture Agreement, the Joint Venture Policy Committee was responsible for the overall management of the Joint Venture, including the direction and control of the persons designated with the daily management responsibilities of the Joint Venture, and the general supervision of the management and conduct of the affairs of the Joint Venture. The Policy Committee consisted of five members, three of which were selected by Vet Labs and two of which were selected by Sparhawk. Decisions of the Policy Committee required a simple majority vote.

Because the Company controlled the operating, financing and investing decisions of the Joint Venture through Vet Labs’ control of the Policy Committee, it consolidated the Joint Venture’s assets, liabilities, revenue and expenses in the Company’s financial statements. The Company funded the Joint Venture’s cumulative losses after 1992 and, accordingly, recorded 100% of these losses in the consolidated financial statements.

On January 13, 2004, the Company, Chemdex and Vet Labs entered into an Asset Purchase Agreement with Sparhawk. Pursuant to the Asset Purchase Agreement, the Company agreed to sell substantially all of the assets of Vet Labs, including its interest in the Joint Venture, to Sparhawk for $5,500,000 in cash. Effective March 4, 2004, this sale was completed and a gain of $1,859,471 was recognized. Simultaneously with the closing, Chemdex advanced $350,000 to Sparhawk in exchange for an unsecured subordinated promissory note bearing interest at 13% per annum and a warrant to purchase 4% of the equity of Sparhawk. The promissory note was payable in full on March 4, 2009. On May 31, 2006, payment in full for principal and interest was received. Interest was payable annually, but could be deferred and added to the principal balance of the promissory note each year at Sparhawk’s discretion. The warrant expired at the earlier of payment in full of the promissory note or March 4, 2014 and therefore expired before it could be exercised. Chemdex also entered into a supply agreement with Sparhawk to supply ferric hydroxide and hydrogenated dextran solution to Sparhawk on an exclusive basis in the United States for 10 years. In connection with the sale, litigation involving the Joint Venture, Sparhawk Laboratories, Inc. v. Veterinary Laboratories, Inc., et al, Case No. 02CV07426, County of Johnson, State of Kansas, was settled, and a Motion of Approval of Settlement and Stipulation of Dismissal with Prejudice was filed with the Court on March 4, 2004.

Since Sparhawk was thinly capitalized and highly leveraged, the Company had deferred $350,000 of the gain relating to the promissory note receivable from Sparhawk. Since payment in full on the promissory note was received on May 31, 2006, the deferred gain of $350,000 was recognized at April 30, 2006 and included in other income on the statement of operations.

Changes in Accounting Policies

No changes in accounting principles or their application have been implemented in the reporting period that would have a material adverse effect on reported income.

Recent Accounting Pronouncements

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140. SFAS No. 156 amends FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective It the beginning of the first fiscal year that begins after September 15, 2006. The Company does not anticipate that the application of SFAS 156 will have an impact on the consolidated financial statements of the Company.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles '''GAAP''), and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. As such, the Company is required to adopt these provisions at the beginning of he fiscal year ending December 31,2008. The Company is currently evaluating the impact of SFAS No. 157 on its financial statements.

In June 2006, the FASB issued FASB Interpretation (“FIN”) No. 48 “Accounting for Uncertainty in income Taxes.” FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109 “Accounting for Income Taxes.” FIN No. 48 prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. Earlier application is encouraged if the enterprise has not yet issued financial statements, including interim financial statements, in the period of adoption. The adoption of FIN No. 48 will not have a material impact on our consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS No. 158 improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. Management does not expect that SFAS No. 158 will have an impact on the consolidated financial statements of the Company.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 addresses how the effects of prior year uncorrected misstatements should be considered when quantifying misstatements in current year financial statements. SAB 108 requires companies to quantify misstatements using both a balance sheet and an income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. When the effect of initial adoption is material, companies will record the effect as a cumulative effect adjustment to beginning of year retained earnings. The adoption of SAB 108 does not have an impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact of SFAS No. 159 on its financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Exchange Rate Sensitivity

The Company’s operations consist of manufacturing activities in Canada. The Company’s products are sold in North America, Europe and the Pacific Rim. While the majority of the sales of Dextran Products, the Company’s Canadian operation, are denominated in United States dollars, the majority of its expenses are incurred in Canadian dollars. The majority of the assets and liabilities of Dextran Products are denominated in Canadian dollars prior to the currency translation adjustment necessary for preparation of the financial statements of the Company contained in this report. When the Canadian dollar rises in value relative to the United States dollar, the carrying value of the assets and liabilities of Dextran Products as stated in United States dollars increases. A rise in the Canadian dollar relative to the United States dollar also results in a decrease in gross margins and net income of Dextran Products. Dextran Products also experiences a foreign exchange gain when the Canadian dollar rises in relation to the United States dollar because it has a net liability exposure to the United States dollar resulting from a United States dollar denominated intercompany loan. Similarly, a decline in the Canadian dollar relative to the United States dollar results in a foreign exchange loss and increased gross margins and net income at Dextran Products. Management monitors currency fluctuations to ensure that an acceptable margin level at Dextran Products is maintained. Management has the ability, to some extent, to adjust sales prices to maintain an acceptable margin level.

The following table presents information about the Company’s financial instruments other than accounts receivable that are sensitive to changes in foreign currency exchange rates. All financial instruments are held for other than trading purposes. The table presents principal cash flows and related weighted average interest rates by expected maturity dates.

	Expected Maturity Date
																			Fair
	1/31/08			1/31/09			1/31/10			1/31/11		1/31/12		Thereafter		Total			Value
	(US$ Equivalent)
Assets:

Short-term investments:
Fixed rate ($Cdn.)		992,633			—			—			—		—		—		992,633			992,633
Average interest rate		4.14	%		—			—			—		—		—		4.14	%
Marketable securities:
Fixed rate ($Cdn.)		643,849			—			—			—		—		—		643,849			636,024
Average interest rate		2.86	%		—			—			—		—		—		2.86	%

Liabilities:

Long-term debt:
Fixed rate ($Cdn.)		8,278			5,168			5,733			—		—		—		19,178			25,213
Average interest rate		10.43	%		10.43	%		10.43	%		—		—		—		10.43	%

Interest Rate Sensitivity

The Company has interest earning assets consisting of investment grade or higher short-term commercial paper and medium-term fixed income instruments. A significant portion of the Company’s debt is at fixed rates. The variable rate debt represents the shareholder loan payable, which is partially offset with the shareholder loan receivable. Both of these financial instruments carry the same interest rate. As such, the Company has no significant risk exposure to changes in interest rates. The following table presents information about the Company’s financial instruments that are sensitive to changes in interest rates. All financial instruments are held for other than trading purposes. The table presents principal cash flows and related weighted average interest rates by expected maturity dates.

	Expected Maturity Date
	1/31/08			1/31/09			1/31/10			1/31/11			1/31/12			Thereafter			Total			Fair Value
	(US$ Equivalent)
Assets:

Short-term investments:
Fixed rate ($Cdn.)		992,633			—			—			—			—			—			992,633			992,633
Average interest rate		4.14	%		—			—			—			—			—			4.14	%
Marketable securities:
Fixed rate ($Cdn.)		643,849			—			—			—			—			—			643,849			636,024
Average interest rate		2.86	%		—			—			—			—			—			2.86	%
Notes receivable:
Variable rate ($US)		50,647			55,586			61,005			66,953			72,635			—			306,828			306,828
Average interest rate		9.75	%		9.75	%		9.75	%		9.75	%		9.75	%		—			9.75	%

Liabilities:

Long-term debt:
Fixed rate ($Cdn.)		8,278			5,168			5,733			—			—			—			19,178			25,213
Average interest rate		10.43	%		10.43	%		10.43	%		—			—			—			10.43	%
Variable rate ($US)		109,586			112,284			115,174			118,272			121,593			259,442			836,352			836,352
Average interest rate		7.32	%		7.33	%		7.34	%		7.35	%		7.35	%		8.95	%		7.61

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Polydex Pharmaceuticals Limited

Quarterly Financial Highlights

January 31, 2007


	Fourth Quarter						Third Quarter						Second Quarter						First Quarter
	Fiscal Year						Fiscal Year						Fiscal Year						Fiscal Year
	2007			2006			2007			2006			2007			2006			2007		2006
Sales from continuing operations		1,842,706			1,606,980			1,366,190			1,062,075			1,856,718			1,273,470			1,433,673		1,322,684
Gross profit		72,472			107,042			208,536			72,800			231,413			126,024			320,022		123,319
Net income (loss) from continuing operations		(132,304	)		(663,541	)		(147,981	)		(261,451	)		(219,814	)		(228,432	)		239,476		(335,629	)
Net income (loss) per common share		(0.05	)		(0.22	)		(0.05	)		(0.09	)		(0.07	)		(0.07	)		0.08		(0.11	)

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders of

Polydex Pharmaceuticals Limited

We have audited the accompanying consolidated balance sheets of Polydex Pharmaceuticals Limited as of January 31, 2007 and 2006 and the related consolidated statements of shareholders’ equity, operations and cash flows for each of the two years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The consolidated statements of shareholders’ equity, operations and cash flows of Polydex Pharmaceuticals Limited for the year ended January 31, 2005 were audited by other auditors whose report dated March 10, 2005, expressed an unqualified opinion on those statements.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Polydex Pharmaceuticals Limited as of January 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for the two years then ended in conformity with generally accepted accounting principles in the United States of America.

Since the accompanying consolidated financial statements have not been prepared in accordance with generally accepted accounting principles and standards in Canada, they may not satisfy the reporting requirements of Canadian statutes and regulations.

“SCHWARTZ LEVITSKY FELDMAN LLP”

Toronto, Ontario, Canada	Chartered Accountants
April 9, 2007	Licensed Public Accountants

F-1

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of

Polydex Pharmaceuticals Limited

We have audited the accompanying consolidated balance sheet of Polydex Pharmaceuticals Limited as of January 31, 2005 and the related consolidated statements of shareholders' equity, operations and cash flows the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Polydex Pharmaceuticals Limited as of January 31, 2005, and the consolidated results of its operations and its cash flows for the year then ended in conformity with United States generally accepted accounting principles.

Toronto, Canada,	/s/ Ernst & Young LLP
March 10, 2005.	Chartered Accountants

F-2

Polydex Pharmaceuticals Limited

CONSOLIDATED BALANCE SHEETS

[Expressed in United States dollars]

As at January 31	2007			2006
	$			$

Assets

Current
Cash and cash equivalents (note 3)		1,384,995			971,451
Trade accounts receivable (note 18)		1,139,186			744,720
Interest receivable (note 12)		-			41,511
Promissory note receivable (note 12)		-			-
Inventories (note 4)		1,338,857			1,549,544
Prepaid expenses and other current assets		100,780			129,362
Total current assets		3,963,818			3,436,588

Property, plant and equipment, net (note 5)		4,308,337			3,280,724
Patents and intangible assets, net (note 6)		53,551			61,591
Assets held for sale		-			4,390
Investments available for sale (note 7)		1,437,636			2,638,441
Due from estate of former shareholder (note 8)		363,956			488,711

		10,127,298			9,910,445

Liabilities and Shareholders' Equity

Current
Accounts payable		1,213,518			574,270
Accrued liabilities		238,493			360,150
Customer deposits		92,757			92,932
Income taxes payable (note 14)		-			44,877
Current portion of long-term debt (note 10a)		32,957			1,011
Current portion of capital lease obligations (note 10b)		4,657			168,430
Current portion of due to shareholder (note 8)		6,000			4,597
Total current liabilities		1,588,382			1,246,267

Long-term debt (note 10a)		374,624			3,748
Capital lease obligations (note 10b)		10,902			16,108
Due to shareholder (note 8)		673,309			671,322
Deferred income taxes (note 14)		121,767			194,938
Total long-term liabilities		1,180,602			886,116
Total liabilities		2,768,984			2,132,383

Commitments and Contingencies (note 20)

Shareholders' equity
Capital stock (note 11)
Authorized:
100,000 Class A preferred shares of $0.10 each
899,400 Class B preferred shares of $0.0167 each
10,000,000 common shares of $0.0167 each
Issued and outstanding:
899,400 Class B preferred shares (January 31, 2006 - 899,400)		15,010			15,010
3,072,846 common shares (January 31, 2006 - 3,058,896)		51,185			50,953
Contributed surplus		23,483,659			23,400,259
Deficit		(16,894,033	)		(16,633,410	)
Accumulated other comprehensive income (notes 19 & 7)		702,493			945,250
Total shareholders' equity		7,358,314			7,778,062
		10,127,298			9,910,445

See accompanying notes

On behalf of the Board:

Director

F-3

Polydex Pharmaceuticals Limited

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

[Expressed in United States dollars]

Years ended January 31, 2007, 2006 and 2005
										Accumulated
										Other			Total
	Preferred		Common		Contributed					Comprehensive			Shareholders'
	Shares		Shares		Surplus		Deficit			Income (Loss)			Equity
	$		$		$		$			$			$

Balance, January 31, 2004		15,010		50,434		23,236,498		(16,284,268	)		(110,343	)		6,907,331

Common share options exercised				242		53,008								53,250
Common share options issued						14,212								14,212
Comprehensive income:
Net income for the year								1,139,911						1,139,911
Unrealized loss on investments											(15,760	)		(15,760	)
available for sale
Currency translation adjustment											451,945			451,945

Balance, January 31, 2005		15,010		50,676		23,303,718		(15,144,357	)		325,842			8,550,889

Common share options exercised				277		82,517								82,794
Common share options issued						14,024								14,024
Comprehensive income:
Net loss for the year								(1,489,053	)					(1,489,053	)
Unrealized loss on investments
available for sale											(12,349	)		(12,349	)
Currency translation adjustment											631,757			631,757

Balance, January 31, 2006		15,010		50,953		23,400,259		(16,633,410	)		945,250			7,778,062

Common share options exercised				232		38,879								39,111
Common share options issued						44,521								44,521
Comprehensive income:
Net loss for the year								(260,623	)					(260,623	)
Unrealized loss on investments
available for sale											(1,321	)		(1,321	)
Currency translation adjustment											(241,436	)		(241,436	)

Balance, January 31, 2007		15,010		51,185		23,483,659		(16,894,033	)		702,493			7,358,314

See accompanying notes

F-4

Polydex Pharmaceuticals Limited

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

[Expressed in United States dollars]

Year ended January 31	2007			2006			2005
	$			$			$

Sales		6,499,287			5,265,209			6,372,359
Cost of goods sold		5,666,844			4,836,024			4,855,941

Gross profit		832,443			429,185			1,516,418

Expenses
General and administrative (note 11b)		1,205,874			1,421,159			1,465,849
Research and development (note 13)		214,865			205,801			114,742
Selling and promotion		171,086			129,576			128,731
Interest expense,net (note 8)		94,790			81,509			91,210
Depreciation		42,186			61,160			36,365
Amortization		-			-			8,518
Foreign exchange gain		(22,857	)		(18,139	)		(46,172	)
Gain on sale of veterinary products assets (note 12)		-			-			(1,859,471	)
Loss (gain) on sale of assets		(20	)		4,581			-
Interest and other income (note 12)		(497,663	)		(148,166	)		(130,131	)
Total expenses (income)		1,208,261			1,737,481			(190,359	)

Income (loss) before income taxes		(375,818	)		(1,308,296	)		1,706,777

Provision for (recovery of) income taxes (note 14)		(115,195	)		180,757			566,866

Net income (loss) for the year		(260,623	)		(1,489,053	)		1,139,911

Unrealized loss on investments available for sale		(1,321	)		(12,349	)		(15,760	)

Currency translation adjustment		(241,436	)		631,757			451,945

Comprehensive income (loss) for the period		(503,380	)		(869,645	)		1,576,096

Per share information:
Earnings (loss) per common share:
Basic		(0.09	)		(0.49	)		0.38
Diluted		(0.09	)		(0.49	)		0.37



Weighted average number of common shares used in
computing net earnings per share for the period:
Basic		3,063,884			3,052,296			3,037,463
Diluted		3,063,884			3,052,296			3,037,463

See accompanying notes

F-5

Polydex Pharmaceuticals Limited

CONSOLIDATED STATEMENTS OF CASH FLOWS

[Expressed in United States dollars]

Year ended January 31	2007			2006			2005
	$			$			$
Cash provided by (used in):

Operating activities:
Net income (loss) for the period		(260,623	)		(1,489,053	)		1,139,911
Add (deduct) items not affecting cash:
Depreciation and amortization		547,297			543,023			513,095
Imputed interest on long-term debt		-			1,363			14,648
Writedown of assets held for sale		4,410			-			-
Deferred income taxes		(69,140	)		121,478			417,003
Amortization of premium on investments available for sale		471			28,005			-
(Gain) Loss on disposal of equipment		(4,430	)		4,581			3,586
Gain on sale of veterinary products business (note 12)								(1,859,471	)
Licence fee charged to due from shareholder		76,978			73,740			81,179
Options issued in exchange for services (note 11b)		44,520			14,024			14,212
Net change in non-cash working capital balances
related to operations (note 15)		322,124			277,654			(634,514	)

Cash provided by (used in) operating activities		661,607			(425,185	)		(310,351	)

Investing activities:
Additions to property, plant and equipment and patents		(1,724,440	)		(418,246	)		(159,554	)
Proceeds from sale of veterinary products business (note 12)		-			-			4,599,218
Decrease in due from shareholder		47,777			77,718			65,960
Decrease in accrued interest on investments		57,580			-			-
Unrealized gain on commercial paper available for sale		9,469			-			-
Proceeds (Acquisition) of investments available for sale		1,123,669			(567,942	)		(1,841,854	)
Proceeds from sale of equipment		4,430			3,748			5,148

Cash provided by (used in) investing activities		(481,515	)		(904,722	)		2,668,918

Financing activities:
Repayment of long-term debt		(21,876	)		(47,745	)		(296,035	)
Proceeds from long-term debt		-			-			5,383
Repayment of capital lease obligations		(169,218	)		(162,873	)		(167,531	)
Increase (decrease) in due to shareholder		3,390			(5,385	)		(1,930	)
Increase (decrease) in long-term bank indebtedness		441,034			(24,170	)		(147,140	)
Exercise of common share options		39,113			82,794			53,250

Cash provided by (used in) financing activities		292,443			(157,379	)		(554,003	)

Effect of exchange rate changes on cash		(58,991	)		57,686			224,959

Net increase (decrease) in cash and cash equivalents		413,544			(1,429,600	)		2,029,523

Cash and cash equivalents, beginning of year		971,451			2,401,051			371,528

Cash and cash equivalents, end of year		1,384,995			971,451			2,401,051


Cash and cash equivalents is comprised of the following:
Cash		382,419			236,422			129,818
Short-term deposits		1,002,576			735,029			2,271,233

		1,384,995			971,451			2,401,051

See accompanying notes

F-6

Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in United States dollars except where otherwise noted]

January 31, 2007 and 2006

1. GENERAL

Polydex Pharmaceuticals Limited [the "Company"] is incorporated in the Commonwealth of the Bahamas and carries on business in Canada. Its principal business activities, carried on through subsidiaries, include the manufacture and sale of veterinary pharmaceutical products and specialty chemicals. These consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles.

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are 100% owned. The subsidiaries are: Dextran Products Limited; Chemdex, Inc.; Polydex Chemicals (Canada) Limited; and Novadex International Limited. All inter-company accounts and transactions have been eliminated on consolidation.

Cash and cash equivalents

These consist of cash and short-term deposits having maturities of less than three months.

Use of estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant accounting estimates relate to the allowance for unrecoverable amounts, depreciation and amortization rates, and the cost of stock options.

Inventories

Inventories of raw materials are stated at the lower of cost and net realizable value, cost being determined on a first-in, first-out basis. Work-in-process and finished goods are valued at the lower of cost and net realizable value, and include the cost of raw materials, direct labour and fixed and variable overhead expenses.

Investments available for sale

Investments available for sale consist of medium-term fixed income investments, trust income funds and mutual funds and are stated at fair market value based on quoted market prices. Interest income is included in other income in the consolidated statements of operations as it is earned. Changes in market values during the holding period are reported as unrealized gain (loss) on investments available for sale and are included in other comprehensive income (loss). Realized gains (losses) are reclassified from accumulated other comprehensive income (loss) on a specific item basis when the security is sold or matured.

F-7

Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in United States dollars except where otherwise noted]

January 31, 2007 and 2006

Property, plant and equipment and patents and intangible assets

Property, plant and equipment are recorded at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets as follows:

Buildings			15 years
Machinery and equipment			3 to 10 years

Patents and intangible assets are recorded at cost and are amortized on a straight-line basis over their estimated useful lives of ten years. Intangible assets consist of intellectual property, government licenses and government license applications.

Useful life is the period over which the asset is expected to contribute to the Company's future cash flows. The Company reviews the recoverability of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on the Company's ability to recover the carrying value of the asset from the expected future pre-tax cash flows of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value.

Costs related to plant refurbishments and equipment upgrades that represent improvements to existing facilities are capitalized. Costs related to repair and maintenance of buildings and equipment are expensed. The Company has no major planned maintenance activity.

Revenue recognition

All revenue is from sales of bulk manufactured products and is recognized when title and risk of ownership of products pass to the customer. Title and risk of ownership pass to the customer pursuant to the applicable sales contract, either upon shipment of product or upon receipt of product by the customer.

Product sold in bulk quantities is tested, prior to release for shipment, to ensure that it meets customer specifications, and in many cases, customers receive samples for their own testing. Approval is obtained from the customer prior to shipping. Further purchases by a customer of a bulk product with the same specifications do not require approvals. Returns of bulk product are rare and generally are not accepted.

Comprehensive income

The Company has adopted SFAS No. 130 Reporting Comprehensive Income. This standard requires companies to disclose comprehensive income in their financial statements. In addition to items included in net income, comprehensive income includes items currently charged or credited directly to shareholders' equity, such as foreign currency translation adjustments.

Shipping and handling costs

Shipping and handling costs incurred by the Company for shipment of products to customers are classified as cost of goods sold.

F-8

Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in United States dollars except where otherwise noted]

January 31, 2007 and 2006

Research and development

Research and development costs are expensed as incurred and are stated net of investment tax credits earned.

Foreign currency translation

The functional currency of the Company's Canadian operations has been determined to be the Canadian dollar. All asset and liability accounts of these companies have been translated into United States dollars using the current exchange rates at the consolidated balance sheet dates. Capital stock is recorded at historical rates. Revenue and expense items are translated using the average exchange rates for the year. The resulting gains and losses have been reported separately as other comprehensive income (loss) within shareholders' equity.

Derivative financial instruments

The Company's Canadian subsidiary enters into foreign exchange contracts from time to time, to manage exposure to currency rate fluctuations related to expected future cash flows. The Company does not engage in speculative trading of derivative financial instruments. The foreign exchange contracts are not designated as hedging instruments, and as a result all foreign exchange contracts are marked to market and the resulting gains and losses are recorded in the consolidated statements of operations in each reporting period. Unrealized gains and losses are included in accrued liabilities in the consolidated balance sheets and in net change in non-cash working capital balances related to operations in the consolidated statements of cash flows.

Income taxes

The Company accounts for income tax under the provision of Statement of Financial Accounting Standards No. 109, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statement or tax returns. Deferred income taxes are provided using the liability method. Under the liability method, deferred income taxes are recognized for all significant temporary differences between the tax and financial statement bases of assets and liabilities.

Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to tax expense in the period of enactment. Deferred tax assets may be reduced if deemed necessary based on a judgmental assessment of available evidence, by a valuation allowance for the amount of any tax benefits which are more likely, based on current circumstances, not expected to be realized.

Stock options

The Company uses the fair value accounting method provided for under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to apply recognition provisions to its employee stock options granted, modified or settled. Compensation expense is recorded at the date stock options are granted. The amount of compensation expense is determined by estimating the fair value of the options granted using the Black-Scholes option pricing model.

F-9

Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in United States dollars except where otherwise noted]

January 31, 2007 and 2006

Earnings (loss) per common share

Basic earnings (loss) per common share is computed using the weighted average number of shares outstanding of 3,063,884 for the year ended January 31, 2007 (2006 - 3,052,296; 2005 - 3,037,463). Diluted earnings (loss) per common share is computed using the weighted average number of shares outstanding adjusted for the incremental shares, using the treasury stock method, attributed to outstanding options to purchase common stock. No incremental shares in 2007 and 2006 (2005 - 26,265), were used in the calculation of diluted earnings (loss) per common share. Options to purchase 14,562, 13,027 and 26,265 common shares in 2007, 2006 and 2005, respectively, were not included in the computation of diluted earnings (loss) per common share because their effect was anti-dilutive.

3. CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of the following:

	2007		2006
	$		$

Cash		382,419		236,422
Short-term deposits		1,002,576		735,029
		1,384,995		971,451

Short-term deposits in the amount of Cdn. $1,181,043 have maturities of less than three months at the date of purchase. Interest rates on the short-term deposits range from 4.04% to 4.31%.

4. INVENTORIES

Inventories consist of the following:

	2007		2006
	$		$

Finished goods		792,128		1,108,626
Work-in-process		364,338		285,422
Raw materials		182,391		155,496
		1,338,857		1,549,544

F-10

Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in United States dollars except where otherwise noted]

January 31, 2007 and 2006

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

2007

2006

Net

Accumulated

book

Accumulated

book

Cost

depreciation

value

Cost

depreciation

value

Land and buildings

3,298,075

825,091

2,472,984

1,788,720

762,183

1,026,537

Machinery and equipment

8,292,772

6,457,419

1,835,353

8,498,352

6,244,165

2,254,187

11,590,847

7,282,510

4,308,337

10,287,072

7,006,348

3,280,724

Included in machinery and equipment are assets under capital lease with a total cost of $1,025,707 (2006 - $1,061,909) and accumulated depreciation of $678,429 (2006 - $593,406). Depreciation of assets under capital lease is included in cost of goods sold. Depreciation of $505,111 was charged to cost of sales in fiscal 2007 (2006- $481,863). Assets not available for use amounted to $1,943,142 (2006 - $346,856).

6. PATENTS AND INTANGIBLE ASSETS

Patents and intangible assets consist of the following:

	2007		2006
	$		$

Cost		80,341		80,341
Less accumulated amortization		26,790		18,750
		53,551		61,591

These patents and intangible assets will be amortized at approximately $8,100 per year over the next 5 years.

F-11

Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in United States dollars except where otherwise noted]

January 31, 2007 and 2006

7. INVESTMENTS AVAILABLE FOR SALE

Investments available for sale, at market value, consist of the following:

	2007		2006
	$		$


Debt security in the amount of Cdn. $750,000 from General Motors Acceptance Corp. maturing on June 7, 2007; floating rate interest is paid quarterly		636,024		623,448
43,628 units (2006-42,752) of DFA Fixed Income Fund
yielding 4.54%		344,081		349,454
TD short term bond fund consisting of Canadian government and
corporate bonds maturing in the next 1-5 years		284,469		—
12,500 capital income trust index units, yielding 8.7%		90,633		—
4,000 preferred shares of Diversified preferred share trust units		82,429
Debt security in the amount of Cdn. $920,649 from the Bank of Nova Scotia yielding 3.35%, matured June 7, 2006		—		801,752
Debt security in the amount of Cdn. $718,000 from GE Capital Canada bearing interest at 4.35% and matured February 6, 2006		—		639,292
15,000 units of Barclays Top 100 Equal Weighted Income Fund		—		144,601
10,000 units of Citadel Stables Series 1 Income fund		—		79,894
		1,437,636		2,638,441

As at January 31, 2007, accumulated other comprehensive income includes unrealized losses on debt securities available for sale of $5,391 (2006 - $18,918) and unrealized losses on income fund trust units of $34,608 (2006-$11,752 of unrealized gains).

8. RELATED PARTY TRANSACTIONS

Amounts due from (to) shareholder consist of the following:

	2007			2006
	$			$

Amounts due from estate of former shareholder [i]		363,956			488,711

Amounts due to shareholder [ii]		(679,309	)		(675,919	)

[i]

Amounts due from estate of former shareholder (the “Estate”) bear interest at the United States banks prime lending rate plus 1.5% (2007 - 9.75%; 2006 - 8.76%), except for an amount of $380,619 (2006 - $457,599) which is non-interest bearing. Interest income on this loan is recognized when realized. These amounts have no fixed terms of repayment. The Estate has pledged 302,409 shares of the Company and has pledged future license fee payments from the Iron Dextran process license agreement [note 13] as collateral for this loan. During 2007, $76,978 (2006 - $73,471; 2005 - $78,168) of license fee payments were made. The Company will continue to hold the pledged assets as collateral until the loan is repaid. The Company had a commitment to pay a death benefit of $110,000 to the Estate. At January 31, 2007, a balance of $39,519 is still to be paid to the Estate. See also “Iron Dextran Process” under Note 13.

F-12

Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in United States dollars except where otherwise noted]

January 31, 2007 and 2006

[ii]

Amounts due to shareholder bear interest at the United States banks prime lending rate plus 1.5% (2007 - 9.75%; 2006 - 8.76%). The Company is required to make monthly payments, inclusive of accrued interest, of $6,000. Based on the current rate of interest, the principal repayment on this loan for fiscal 2007 would be approximately $6,000. This loan may not be called.

Interest expense recorded with respect to amounts due to shareholder is as follows:

	2007		2006		2005
	$		$		$

Interest expense		64,390		53,113		37,569

9. BANK INDEBTEDNESS

The Company has a Canadian operating line of credit of Cdn. $750,000 (U.S. $636,024) (2006 - Cdn. $1,250,000; U.S. $1,097,000), none of which was utilized at January 31, 2007 (2006 - Nil). The Canadian line of credit bears interest at the Canadian banks' prime lending rate plus 0.75% (2007 - 6.00%; 2006 - 5.25%). During March 2006, a term loan of Cdn $500,000 (U.S. $424,016) was obtained for the purchase of equipment, bearing interest of 6.95%. Bank indebtedness is collateralized by a general security agreement over the Company's assets and a collateral mortgage of $500,000 on the Dextran Products Limited ("Dextran Products") building.

During November 2004, the Company entered into United States dollar forward foreign exchange contracts with the bank to lock in an exchange rate for converting United States dollars to Canadian dollars. The Company was committed to selling $150,000 per month for the period from February 2005 to April 2005 at an exchange rate of $1.1772. At January 31, 2005, the net unrealized loss in respect of these foreign currency contracts amounted to $23,203, which was included in the foreign exchange gain (loss) on the consolidated statements of operations. There are no foreign exchange contracts outstanding at January 31, 2006 and 2007

10. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

[a] Long-term debt consists of the following:

	2007		2006
	$		$

Note payable in blended quarterly payments of Cdn. $419 (U.S. $355), bearing interest at a fixed rate of 10%,
maturing September 10, 2010, with the vendor holding a security interest in the equipment		3,620		4,759

Bank term loan (note 9) payable in monthly installments of
Cdn. $5,792 (U.S. $4,912) principal and interest at the Canadian banks’’ prime lending rate plus 0.75% (2007 - 6.95%), maturing May 2016		403,961		—
		407,581		4,759
Less current portion		32,957		1,011
		374,624		3,748

Interest expense for the year for long-term debt was $22,913 (2006 - $533 )

F-13

Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in United States dollars except where otherwise noted]

January 31, 2007 and 2006

Principal repayments on the long-term debt are as follows:

			$

2008			32,957
2009			35,390
2010			37,947
2011			39,240
2012			42,056
Thereafter			219,991
			407,581

[b] Capital lease obligations consist of the following:

	2007		2006
	$		$

Obligation (Cdn. $18,347) under a capital lease, repayable in quarterly instalments, bearing interest at 10.43% and maturing December 2009. The Company has an option to purchase the asset for fair value at the end of the lease term		15,559		20,455
Obligation under a capital lease, repaid in monthly instalments, bearing interest at 9% and maturing November 2006, at which time the Company exercised an option to purchase the asset for $1.		—		135,399
Obligation under a capital lease, repaid in monthly instalments, bearing interest at 7.59% and maturing November 2006, at which time the Company exercised an option to purchase the asset for $1.		—		28,684

		15,559		184,538
Less current portion		4,657		168,430
		10,902		16,108

Future minimum annual lease payments on the capital lease obligations are as follows:

	$

2008		6,115
2009		6,115
2010		6,115
Total minimum lease payments		18,345
Less amount representing imputed interest		2,786
		15,559

Interest expense for the year for capital lease obligations was $9,199 (2006 - $23,541 )

F-14

Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in United States dollars except where otherwise noted]

January 31, 2007 and 2006

11. CAPITAL STOCK

[a]

Share capital issued and outstanding

[i] Class A preferred shares

The Class A preferred shares will carry dividends, will be convertible into common shares of the Company and will be redeemable, at rates as shall be determined by resolution of the Board of Directors. No Class A preferred shares have been issued to date.

[ii] Class B preferred shares

The Class B preferred shares carry no dividends, are non-convertible and entitle the holder to two votes per share. 899,400 of the Class B preferred shares have been issued and are outstanding.

[iii] Common shares

During the year ended January 31, 2007, 13,950 common share options were exercised for $39,111 resulting in the issuance of 13,950 common shares.

During the year ended January 31, 2006, 16,600 common share options were exercised for $82,794 resulting in the issuance of 16,600 common shares.

During the year ended January 31, 2005, 14,500 common share options were exercised for $53,250 resulting in the issuance of 14,500 common shares.

[b]

Share option plan

The Company maintains an incentive share option plan for management personnel for 1,000,000 options to purchase common shares. The Company also issues options to certain consultants for services provided to the Company.

All options granted have a term of five years and vest immediately. At January 31, 2007, the Company has 37,725 options outstanding at exercise prices ranging from $2.50 to $10.01 and a weighted average exercise price of $5.64. The options, which are immediately exercisable and expire on dates between January 31, 2008 and January 31, 2012, entitle the holder of an option to acquire one common share of the Company.

On July 8, 2006, 7,500 common share options were granted to employees and non-employees of the Company. These options were valued at $35,160 and were included in general and administrative expense, in accordance with SFAS 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 5.04%; dividend yield of nil; volatility factor of the expected market price of the Company's common stock of 0.644, and an expected life of five years. On January 31, 2007, 6,000 common share options were issued to the independent directors of the Company. These options were valued at $9,361 and were included in general and administrative expense, in accordance with SFAS 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 5.25%; dividend yield of nil; volatility factor of the expected market price of the Company's common stock of 0.754, and an expected life of five years.

F-15

Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in United States dollars except where otherwise noted]

January 31, 2007 and 2006

During the year ended January 31, 2006, 3,975 common share options were issued to the independent directors of the Company. These options were valued at $14,024 and were included in general and administrative expense, in accordance with SFAS 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 4.35%; dividend yield of nil; volatility factor of the expected market price of the Company's common stock of 0.658, and an expected life of five years.

During the year ended January 31, 2005, 4,365 common share options were issued to the independent directors of the Company. These options were valued at $14,212 and were included in general and administrative expense, in accordance with SFAS 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 3.71%; dividend yield of nil; volatility factor of the expected market price of the Company's common stock of 0.681, and an expected life of five years.

Details of the outstanding options, which are all currently exercisable, are as follows:

	Share options									Weighted average exercise price per share
	2007			2006			2005			2007		2006		2005
	#			#			#			$		$		$

Options outstanding,
beginning of year		42,175			86,300			427,935			4.24		4.75		3.92
Granted		13,500			3,975			4,365			6.89		7.52		6.86
Exercised		(13,950	)		(16,600	)		(14,500	)		2.80		4.99		3.67
Expired		(4,000	)		(31,500	)		(331,500	)		5.00		5.66		3.75
Options outstanding,
end of year		37,725			42,175			86,300			5.64		4.24		4.75

Weighted average fair
value of options granted
during the year										$	4.12	$	3.53	$	3.26

The following table summarizes information relating to the options outstanding at January 31, 2007:

			Weighted average
Exercise	Number		remaining
price	outstanding		contractual life
$			[months]

2.50		12,000		12
3.00		6,000		60
6.86		4,365		36
7.52		3,975		48
7.72		3,885		24
10.01		7,500		54
		37,725		36

F-16

Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in United States dollars except where otherwise noted]

January 31, 2007 and 2006

12. VETERINARY LABORATORIES, INC.

Sparhawk Laboratories, Inc.

In 1992, Veterinary Laboratories, Inc. ("Vet Labs") and Sparhawk Laboratories, Inc. ("Sparhawk") entered into the Vet Labs - Sparhawk Joint Venture (the "Joint Venture") for the manufacture and sale of veterinary pharmaceutical products. Vet Labs and Sparhawk each owned 50% of the Joint Venture. The Company controlled the Joint Venture through its control of the Joint Venture Policy Committee and therefore consolidated its assets, liabilities, revenue and expenses in its consolidated financial statements until March 4, 2004. The Company had funded the Joint Venture's losses since 1992 and, accordingly, has recorded 100% of these cumulative losses in the consolidated financial statements.

On January 13, 2004, the Company entered into an Asset Purchase Agreement with Sparhawk. Pursuant to this Asset Purchase Agreement, the Company agreed to sell the finished product veterinary pharmaceutical business, including substantially all of the assets of Vet Labs, to Sparhawk for $5,500,000 in cash. Effective March 4, 2004, this sale was completed. Simultaneously, on March 4, 2004, Chemdex, Inc. ("Chemdex"), a wholly-owned subsidiary of the Company, advanced $350,000 to Sparhawk in exchange for a promissory note bearing interest at 13% per annum and a warrant to purchase 4% of the equity of Sparhawk for no additional consideration. The promissory note was due in full on March 4, 2009. On May 31, 2006, payment in full for principal and interest was received. Interest was payable annually on the anniversary date, but could be deferred and added to the principal balance of the promissory note each year at Sparhawk's discretion. At January 31, 2006, interest of $41,511 was accrued and reported as interest receivable on the consolidated balance sheet. The warrant expired at the earlier of payment in full of the promissory note or March 4, 2014 and therefore expired before it could be exercised. Pursuant to a definitive supply agreement (the "Supply Agreement") entered into on March 4, 2004, Chemdex agreed to supply ferric hydroxide and hydrogenated dextran solution to Sparhawk on an exclusive basis in the United States for 10 years. Chemdex also granted to Sparhawk an exclusive license to use the drug master file to manufacture 10% bulk Iron Dextran for veterinary use, and the use of certain equipment during the 10-year period of the Supply Agreement. Pursuant to definitive agreements, the Company made customary representations, warranties and indemnities and agreed to a full release of all claims against Sparhawk arising from litigation related to the Joint Venture. Similarly, Sparhawk agreed to a full release of all claims against the Company arising from the Joint Venture litigation.

The sale resulted in a gain of $2,209,471, of which $1,859,471 was recognized in the consolidated statements of operations and $350,000 was deferred. The deferred gain of $350,000 related to the promissory note receivable from Sparhawk as Sparhawk was thinly capitalized and highly leveraged. Since payment in full on the promissory note was received on May 31, 2006, the deferred gain of $350,000 was recognized at April 30, 2006 and included in other income on the consolidated statement of operations.

F-17

Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in United States dollars except where otherwise noted]

January 31, 2007 and 2006

13. LICENSE AGREEMENTS AND RESEARCH AND DEVELOPMENT

The Company has made claims for investment tax credits on research and development activities. Research and development expenditures have been reduced by investment tax credits as follows:

	2007		2006			2005
	$		$			$

Research and development expenditures		214,865		215,482			127,847
Investment tax credits		—		(9,681	)		(13,105	)
Research and development expense		214,865		205,801			114,742

Iron Dextran process

The Company has an agreement with the Estate which grants the Company the exclusive worldwide license to use a certain process for producing Iron Dextran. This license agreement expires in 2014. The Company pays a license fee based on production volumes. The total license fee incurred during the year was $76,978 [2006 - $73,471; 2005 - $78,168]. These payments are applied to the balance owing by the Estate [note 8[i]].

Cellulose Sulphate BV Clinical Evaluation Program

During September 2004, the Company entered into an agreement with a research organization to conduct a pilot clinical study on the use of cellulose sulphate for the treatment of bacterial vaginosis. During the year ended January 31, 2006, the Company made payments of $26,000. A final payment of $38,668 is due upon completion of the clinical study. In March of 2006, the Company also entered into an agreement for the monitoring of the clinical trial at cost of $31,986. Both of these amounts are yet to be paid since the final report has not been completed. The Company expects to make such payments in fiscal 2008.

F-18

Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in United States dollars except where otherwise noted]

January 31, 2007 and 2006

14. INCOME TAXES

[a]	Substantially all of the Company's activities are carried out through operating subsidiaries in Canada and the United States. The Company's effective income tax rate is dependent on the tax legislation in each country and the operating results of each subsidiary and the parent company.

The components of income (loss) before income taxes are as follows:

	2007			2006			2005
	$			$			$

Bahamas		(244,022	)		(185,653	)		(642,870	)
Canada		(510,970	)		(1,088,398	)		250,863
United States		379,174			(34,245	)		2,098,784
		(375,818	)		(1,308,296	)		1,706,777

During fiscal 2006, the tax residency of the parent company, Polydex Pharmaceuticals Limited, was determined to be Canada, for the years 1999 to the present. Due to the losses incurred in the Company during that period, no income taxes payable were incurred. The provision for (recovery of) income taxes consists of the following:

	2007			2006			2005
	$			$			$
Foreign witholding taxes and other on Bahamian income		—			—			123,000

Provision for (recovery of) income taxes based on
Canadian statutory income tax rates		(189,059	)		(370,055	)		92,819
Foreign withholding taxes		—			56,601			—
Decrease in tax reserve		(46,055	)		—			(232,739	)
Increase (decrease) in valuation allowance		81,833			651,107			(36,009	)
Tax and exchange rate changes on deferred tax items		(3,554	)		(13,343	)		4,654
Items not deductible for tax		41,640			(19,603	)		(21,859	)
		(115,195	)		304,707			(193,134	)

Provision for (recovery of) income taxes based on
United States income tax rates		140,294			(12,671	)		776,550
Tax recovery on Joint Venture partner's
share of income		—			—			(160,697	)
Tax on non-deductible items		—			—			(23,511	)
Increase (decrease) in valuation allowance		(140,294	)		(111,279	)		44,658
		—			(123,950	)		637,000
Provision for (recovery of) income taxes		(115,195	)		180,757			566,866

F-19

Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in United States dollars except where otherwise noted]

January 31, 2007 and 2006

Significant components of the provision for (recovery of) income taxes attributable to continuing operations are as follows:

	2007			2006			2005
	$			$			$

Canadian deferred tax recovery		(69,140	)		(183,285	)		(280,453	)
Canadian deferred tax expense		—			304,763			197,456
Canadian current tax expense (recovery)		(46,055	)		183,229			12,863
United States deferred tax expense		—			—			500,000
United States current tax expense		—			—			137,000
United States current tax recovery		—			(123,950	)		—
		(115,195	)		180,757			566,866

[b]	Deferred tax assets and liabilities have been provided on temporary differences that consist of the following:

	2007			2006			2005
	$			$			$

Deferred tax assets
Canadian
Non-capital losses		1,120,327			1,054,054			—
Unclaimed research and development expenses		285,444			295,518			255,485
Net capital losses [note 14[c]]		164,976			188,353			140,173
Other items		15,160			27,733			84,566
United States
Net operating loss carryforwards		42,981			84,371			—
Unpaid intercompany interest		—			—			149,706
Allowance on Sparhawk note [note 12]		—			84,206			84,206
		1,628,888			1,734,235			714,136
Less valuation allowance		1,628,888			1,734,235			421,160
		—			—			292,976

Deferred tax liabilities
Excess of carrying value over tax value of
depreciable assets		(119,097	)		(185,353	)		(214,560	)
Investment tax credits and other items		(2,670	)		(9,585	)		(143,715	)
Net deferred tax liabilities		(121,767	)		(194,938	)		(65,299	)

[c]	The Canadian subsidiaries have non-capital loss carryforwards available to reduce future years’ income for tax purposes totaling approximately $2,635,000. These non-capital losses expire from 2008 to 2017.

The Canadian subsidiaries also have deductions available to reduce future years' income for tax purposes on account of net temporary differences resulting from expense items reported for income tax purposes in different periods than for financial statement purposes totaling approximately $1,049,000 and $563,000 for federal and provincial purposes, respectively. Certain Canadian subsidiaries also have net capital losses available for carryforward of approximately $478,000 available to offset future taxable capital gains. These potential deductions and net capital losses have an indefinite carryforward period.

F-20

Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in United States dollars except where otherwise noted]

January 31, 2007 and 2006

[d]

The Company has not recorded a deferred tax liability related to its investment in foreign subsidiaries. The Company has determined that its investment in these subsidiaries is permanent in nature and it does not intend to dispose of or realize dividends from these investments in the foreseeable future. However, if either of these events were to occur, the Company will be liable for withholding taxes. The amount of the deferred tax liability related to the Company's investment in foreign subsidiaries is not reasonably determinable.

15. CONSOLIDATED STATEMENTS OF CASH FLOWS

The net change in non-cash working capital balances related to operations consists of the following:

	2007			2006			2005
	$			$			$

Decrease (increase) in current assets
Trade accounts receivable		(436,313	)		246,607			(371,170	)
Interest receivable		41,511			—			(41,511	)
Inventories		164,193			98,154			(196,214	)
Prepaid expenses and other current assets		26,287			(7,926	)		(69,916	)
		(204,322	)		336,835			(678,811	)
Increase (decrease) in current liabilities
Accounts payable		685,309			66,247			(83,326	)
Accrued liabilities		(117,143	)		(27,892	)		12,274
Customer deposits		3,113			(13,006	)		(13,190	)
Income taxes payable		(44,833	)		(84,530	)		128,539
		322,124			277,654			(634,514	)

Cash paid during the year for interest was $89,365 (2006 - $27,033; 2005 - $38,993). Cash paid during the year for income taxes was $ Nil (2006 - $3,891; 2005 - $6,433).

There were no capital equipment acquisitions under capital leases for the year ended January 31, 2007 and 2006. For the year ended January 31, 2005, capital equipment acquired under capital lease of $23,137 was treated as non-cash additions.

16. SEGMENTED INFORMATION

All operations are carried out through Dextran Products Limited (“Dextran”) in Canada and through Chemdex in the United States. Each of Dextran and Chemdex operated as separate strategic business units offering different products, until the sale of the finished product veterinary pharmaceutical business on March 4, 2004 [note 12]. Until March 4, 2004, each subsidiary comprised a reportable segment as follows:

·	Dextran Products - manufactures and sells bulk quantities of Dextran and several of its derivatives to large pharmaceutical companies throughout the world.

·	Chemdex - manufactured and sold veterinary pharmaceutical products and specialty chemicals in the United States. The primary customers were distributors and private labelers, who in turn sold to the end user of these products.

F-21

Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in United States dollars except where otherwise noted]

January 31, 2007 and 2006

After March 4, 2004, Chemdex only sells bulk quantities of a specific dextran derivative to Sparhawk under the Supply Agreement, as described in note 12. Management has since determined that Polydex Pharmaceuticals does not operate differing segments, and that providing such information would not be informative to readers of these financial statements. The comparative information from the prior periods has therefore been restated to conform to this basis of reporting.

	2007 $		2006 $		2005 $
Total revenue by significant customer:
Customer A Customer B Customer C Customer D		1,296,702 780,039 668,001 618,878		1,111,402 452,820 379,342 534,222		886,749 400,360 425,860 492,884
		3,363,620		2,477,786		2,205,853

	2007 $		2006 $		2005 $
Sales by geographic destination:
Europe United States Other Canada Pacific Rim		2,796,710 1,283,251 943,768 893,977 581,581		2,237,430 1,086,243 635,490 512,031 794,015		2,130,180 1,950,761 562,557 854,989 873,872
	$	6,499,287	$	5,265,209	$	6,372,359

F-22

Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in United States dollars except where otherwise noted]

January 31, 2007 and 2006

17. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of financial instruments has been determined based on available market information and appropriate valuation methodologies.

The carrying values of cash and cash equivalents, trade accounts receivable, interest receivable and accounts payable approximate their fair values as at January 31, 2007 because of the short period to maturity of these financial instruments.

The estimated fair values of the bank indebtedness, due to shareholder, long-term debt and capital lease obligations are not materially different from the carrying values for financial statement purposes as at January 31, 2007 and 2006. The estimated fair value of the amount due from shareholder is not determinable because the amount has no fixed terms of repayment.

18. OTHER DISCLOSURES

[a]

Concentration of accounts receivable

As at January 31, 2007, four (2006 - three) customers of the Company comprised 68% (2006 - 71%) of the trade accounts receivable balance. No other customers had trade accounts receivable outstanding at yearend that represented more than 10% of the Company's trade accounts receivable balance.

[b]

Foreign currency risk

The Company is exposed to foreign currency risk through its net investment in its Canadian operations. The Company has not entered into hedging arrangements related to the foreign currency risk exposure. The Company enters into foreign exchange contracts from time to time to manage exposure to currency fluctuations as described in note 9.

19. ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of other accumulated comprehensive income are as follows:

	2007			2006
	$			$

Unrealized losses on investments available for sale		(13,670	)		(12,349	)
Currency translation		716,163			957,599
Accumulated other comprehensive income		702,493			945,250

20. COMMITMENTS AND CONTINGENCIES

As at January 31, 2007, the Company had commitments of $545,488 (2006 - $118,555) for capital expenditures related to the plant refurbishment at Dextran Products in Toronto, and $53,542 (2006 - $70,654) for other commitments.

F-23

Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in United States dollars except where otherwise noted]

January 31, 2007 and 2006

21. RECENT ACCOUNTING PRONOUNCEMENTS

F-24

Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[Expressed in United States dollars except where otherwise noted]

January 31, 2007 and 2006

22. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS

The comparative consolidated financial statements have been reclassified from statements previously presented to conform to the presentation of the 2007 consolidated financial statements.

F-25

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On May 27, 2005, the Company acted to dismiss Ernst & Young LLP Chartered Accountants as its independent registered accounting firm. This determination followed the Company’s decision to seek proposals from independent registered accounting firms to audit its financial statements, and was approved by the Company’s Board of Directors upon the recommendation of its Audit Committee. The decision to terminate the Company’s relationship with Ernst & Young LLP Chartered Accountants did not involve a dispute with the Company over accounting policies or practices. During the two fiscal years ended January 31, 2005 and during the interim period from that date to May 27, 2005, there were no disagreements with Ernst & Young LLP Chartered Accountants on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Ernst & Young LLP Chartered Accountants, would have caused Ernst & Young LLP Chartered Accountants to make reference to the subject matter of the disagreements in connection with its report. No reportable events described under Item 304(a)(1)(v) of Regulation S-K occurred within the two fiscal years ended January 31, 2005 and during the period from that date to May 27, 2005.

Effective May 27, 2005, the Company engaged Sloan Partners LLP as its independent registered accounting firm to audit the Company’s financial statements. During the two fiscal years ended January 31, 2005 and during the interim period from that date to May 27, 2005, the Company did not consult Sloan Partners LLP on any matter.

On January 11, 2006, Sloan Partners LLP, divested its reporting issuer audit practice into Schwartz Levitsky Feldman LLP, a registered accounting firm having its principal office in Toronto, Ontario, Canada. The relationship of the Company with Sloan Partners LLP was consequently terminated due to this transaction. This termination did not involve a dispute between the Company and Sloan Partners LLP over accounting policies or practices.

During the interim period from May 27, 2005 to January 11, 2006, there were no disagreements on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements if not resolved to the satisfaction of the Company’s independent registered accounting firm, would have caused the Company’s independent registered accounting firm to make reference to the subject matter of the disagreements in connection with its report. No reportable events described under Item 304(a)(1)(v) of Regulation S-K occurred within the period from May 27, 2005 to January 11, 2006.

Effective January 11, 2006, the Company, upon the recommendation of the Audit Committee of its Board of Directors, engaged Schwartz Levitsky Feldman LLP as its independent registered accounting firm to audit the Company’s financial statements. In the two fiscal years ended January 31, 2005 and during the interim period from that date to January 11, 2006, the Company did not consult Schwartz Levitsky Feldman LLP on any matter.

ITEM 9A.

CONTROLS AND PROCEDURES

The Company completed an evaluation as of the end of the period covered by this report under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in assuring that information required to be disclosed in the Company’s Exchange Act reports is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure. .

There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation discussed above that occurred in the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B.

OTHER INFORMATION

Not applicable.

PART III

ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required under this item is incorporated herein by reference from the material contained under the captions “Board of Directors,” “Executive Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with its 2007 Annual Meeting of Members.

Code of Ethics

The Company has adopted a code of ethics that applies to all of its directors, executive officers (including its chief executive officer, chief financial officer, other senior financial officers and any person performing similar functions). The Company has made the Code of Ethics available on its website at www.polydex.com under the caption “Investor Relations.”

ITEM 11.

EXECUTIVE COMPENSATION

The information required under this item is incorporated herein by reference from the material contained under the captions “Board of Directors,” “Board Meetings and Compensation,” and “Compensation of Executive Officers,” in the Company’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with its 2007 Annual Meeting of Members.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required under this item is incorporated herein by reference from the material contained under the captions “Ownership of Voting Securities” and “Equity Compensation Plan Information” in the Company’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with its 2007 Annual Meeting of Members.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required under this item is incorporated herein by reference from the material contained under the captions “Compensation of Executive Officers,” “Compensation Committee Interlocks and Insider Participation” and “Transactions With the Company” in the Company’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with its 2007 Annual Meeting of Members.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required under this item is incorporated herein by reference from the material contained under the captions “Audit Fees,” “Audit-Related Fees,” “Tax Fees,” and All Other Fees” in the Company’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with its 2007 Annual Meeting of Members.

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)

The following documents are filed as a part of this Annual Report on Form 10-K:

(1)

Financial Statements of Polydex Pharmaceuticals

Report of Independent Auditors — Schwartz Levitsky Feldman LLP

Report of Independent Auditors — Ernst & Young LLP Chartered Accountants

Consolidated Balance Sheets

Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Operations

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

(2)

Financial Statement Schedules

Schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore, have been omitted.

(3)

Exhibits

3.1

Memorandum of Association of Polydex Pharmaceuticals Limited, as amended (filed as Exhibit 3.1 to the Annual Report on Form 10-K filed April 30, 1997, and incorporated herein by reference)

3.2

Articles of Association of Polydex Pharmaceuticals Limited, as amended (filed as Exhibit 3.2 to the Quarterly Report on Form 10-Q filed September 13, 1999, and incorporated herein by reference)

10.1

Employment Agreement between Polydex Pharmaceuticals Limited and George G. Usher dated December 22, 1993 (filed as Exhibit 10.2 to the Annual Report on Form 10-K filed April 30, 1997, and incorporated herein by reference)*

10.2

Amendment to Employment Agreement between Polydex Pharmaceuticals Limited and George G. Usher dated February 1, 1999 (filed as Exhibit 10.4 to the Annual Report on Form 10-K filed April 29, 1999, and incorporated herein by reference)*

10.3

Research Agreement among Dextran Products Limited, Canadian Microbiology Consortium, British Columbia’s Children’s Hospital and the University of British Columbia, dated April 1, 1996 (filed as Exhibit 10.4 to the Annual Report on Form 10-K filed April 30, 1997, and incorporated herein by reference)

10.4

Joint Venture Agreement among Chemdex, Inc., Veterinary Laboratories Inc. and Sparhawk Laboratories, Inc., dated December 1, 1992 (filed as Exhibit 10.5 to the Annual Report on Form 10-K filed April 30, 1997, and incorporated herein by reference)

10.5

Asset Purchase Agreement dated as of January 13, 2004, by and among Sparhawk Laboratories, Inc., Polydex Pharmaceuticals Limited, Chemdex, Inc. and Veterinary Laboratories, Inc. (filed as Exhibit 10.9 to the Annual Report on Form 10-K filed April 30, 2004, and incorporated herein by reference)

10.6

Supply Agreement, dated as of March 1, 2004, by and between Chemdex, Inc. and Sparhawk Laboratories, Inc. (filed as Exhibit 10.10 to the Annual Report on Form 10-K filed April 30, 2004, and incorporated herein by reference)

10.7

Unsecured Subordinated Promissory Note dated March 4, 2004 made by Sparhawk Laboratories, Inc. in favor of Chemdex, Inc. (filed as Exhibit 10.11 to the Annual Report on Form 10-K filed April 30, 2004, and incorporated herein by reference)

10.8

Warrant and Repurchase Agreement, dated March 4, 2004 issued by Sparhawk Laboratories, Inc. to Chemdex, Inc. (filed as Exhibit 10.12 to the Annual Report on Form 10-K filed April 30, 2004, and incorporated herein by reference)

Subsidiaries of Polydex Pharmaceuticals Limited (filed as Exhibit 21 to the Annual Report on Form 10-K filed April 28, 2000, and incorporated herein by reference)

31.1

Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

31.2

Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

32.1

Certification of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

32.2

Certification of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

* Management contract or compensatory plan or arrangement required to be included as an exhibit to this annual report on Form 10-K.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	POLYDEX PHARMACEUTICALS LIMITED

Date: April 30, 2007	By: /s/ George G. Usher
	George G. Usher, President and
	Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Date: April 30, 2007	/s/ George G. Usher
	George G. Usher, Director, President
	and Chief Executive Officer
	(Principal Executive Officer)

Date: April 30, 2007	/s/ John A. Luce
	Chief Financial Officer
	(Principal Financial and Accounting
	Officer)

Date: April 30, 2007	/s/ Joseph Buchman
	Joseph Buchman, Director

Date: April 30, 2007	/s/ Derek John Michael Lederer
	Derek John Michael Lederer, Director

Date: April 30, 2007	/s/ John L.E. Seidler
	John L.E. Seidler, Director

EXHIBIT INDEX

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

31.2	Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002