POLYDEX PHARMACEUTICALS LIMITED

TABLE OF CONTENTS

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains various "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which represent the expectations or beliefs of Polydex Pharmaceuticals Limited (the ‘Company’) 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 Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q, whether as a result of new information, future events, changed circumstances or any other reason after the date of this report.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normally recurring accruals) considered necessary for a fair presentation have been included.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.

Basis of Presentation:

The information contained in the interim consolidated financial statements is condensed from that which would appear in annual consolidated financial statements. The interim consolidated financial statements included herein should be read in conjunction with the audited financial statements, and notes thereto, and other financial information contained in the 2008 Annual Report on Form 10-K for the fiscal year ended January 31, 2008 as filed by Polydex Pharmaceuticals Limited (the "Company") with the Securities and Exchange Commission. The unaudited interim consolidated financial statements as of October 31, 2008 and 2007 include all normal recurring adjustments which management considers necessary for a fair presentation. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the entire fiscal year. The interim consolidated financial statements include the accounts and transactions of the Company and its majority owned subsidiaries in which the Company has equal to or more than a 50% ownership interest and exercises control.

2.

Significant Accounting Policies:

Basis of consolidation
The interim consolidated financial statements include the accounts of the Company and its subsidiaries. All inter-company accounts and transactions have been eliminated on consolidation.

Use of estimates
The preparation of consolidated 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 interim consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates.

Cash and cash equivalents
Cash and cash equivalents include cash and short-term deposits with maturities of less than three months at the date of purchase.

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 labor and fixed and variable overhead expenses.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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
Revenue results from sales of bulk manufactured products. Revenue 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.

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.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

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 the Company except capital stock have been translated into United States dollars using the current exchange rates at the interim consolidated balance sheet dates. Capital stock is recorded at historical rates. Revenue and expense items are translated using the average exchange rates for the period. The resulting gains and losses have been reported separately as accumulated other comprehensive income within shareholders’ equity.

Stock options
The Company follows Statement of Financial Accounting Standards No. 123(R), "Accounting for Stock-Based Compensation" ("SFAS 123(R)"). Under SFAS 123(R), compensation expense is recognized on the date of grant, based on the fair value of the options granted.

Foreign exchange contracts
From time to time, the Company enters into forward exchange contracts to mitigate its foreign currency exposure. The Company classifies derivative instruments such as forward exchange contracts, as held-for-trading, and the unrealized gains or losses on these contracts are recorded in the income statement.

Earnings (loss) per common share
Basic earnings (loss) per common share is computed using the weighted average number of common shares outstanding of 3,072,846 for the three months ended October 31, 2008 (2007 - 3,072,846). Diluted earnings (loss) per common share is computed using the weighted average number of common shares outstanding adjusted for the incremental shares, using the treasury stock method, attributed to outstanding options to purchase common stock. Incremental shares of nil at October 31, 2008 and October 31, 2007 were used in the calculation of diluted earnings (loss) per common share, as their effect was anti-dilutive. Options to purchase common shares of nil were included in the computation of diluted earnings (loss) per common share as at October 31, 2008. Options to purchase common shares of nil at October 31, 2007 were included in the computation of diluted earnings (loss) per common share.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

4.

Investments available for sale consist of the following:

Canadian short-term fixed income bond fund is currently yielding 3.35%. The Global fixed income bond fund is currently yielding 3.1%. Investments available for sale are stated at fair market value, based on quoted market prices. An unrealized loss of $22,431 has been reclassified from Accumulated other comprehensive income.

5.

Stock-based Employee Compensation:

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

All options granted have terms of five years and vest immediately. At October 31, 2008, the Company had 63,699 options outstanding at exercise prices ranging from $0.79 to $10.01 and a weighted average exercise price of $3.34. The options, which are immediately exercisable and expire on dates between January 31, 2009 and January 31, 2013, entitle the holder of an option to acquire one common share of the Company.

The Company uses the fair value method in accordance with SFAS 123 to account for awards of stock-based employee compensation. No stock-based employee compensation expense was recorded during the period from February 1, 2008 to October 31, 2008, because there were no options granted during this period

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

6.

Segmented Information:

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company’s fiscal year ends on January 31^st of each year. In this report, fiscal year 2009 refers to the Company’s fiscal year ended January 31, 2009. The following discussion should be read in conjunction with the October 31, 2008 interim consolidated financial statements and notes thereto included elsewhere in this report. Operating results for the nine months ended October 31, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2009. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended January 31, 2008. 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.

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 wholly-owned subsidiaries, Dextran Products and Chemdex.

The manufacture and sale of bulk quantities of dextran and derivative products for sale to large pharmaceutical companies throughout the world is conducted through Dextran Products in Canada, and Chemdex in the United States which distributes ferric hydroxide and hydrogenated dextran to Sparhawk pursuant to a definitive supply agreement.

Management Objectives for Fiscal 2009.

Challenges that have afflicted Polydex Pharmaceuticals Limited for more than the past year and a half have continued largely unabated into the third quarter of fiscal year 2009. As a Canadian based manufacturer of pharmaceutical based compounds exporting internationally, the increase in value of the Canadian dollar by approximately 18% compared to the United States dollar from January of 2007 until late in the third quarter of fiscal year 2009 had severely reduced the profitability of the Canadian operations, and negatively impacted the Company’s cash flows. In addition, the world wide increase in the price of commodities has resulted in lowered hog production, especially in Europe, where the Company has traditionally derived a substantial portion of its sales. The cancellation of Phase III HIV clinical trials in January of 2007 for the Company’s cellulose sulphate compound known as Ushercell was very disappointing to the Company, and resulted in a drastic decline in our share price on NASDAQ, though it did not have an impact on our core operations. This decline in share price eventually led to the Company’s shares being suspended from trading on the NASDAQ Capital Market on September 12, 2008 and delisting in December 2008. Throughout this period, the Company has been investing its significant cash reserves in the refurbishment of the Toronto plant, in order to capitalize on the higher margins available for its powdered products line. With all of these challenges occurring at the same time, management has reacted in a number of effective ways, in addition to those mentioned in our 10Q for the quarter ending July 31, 2008, including:
 

Though rigorous cost cutting and careful price increases have been effective, our cash reserves have been significantly reduced, and the Company’s future will only be assured through meeting the increasingly competitive demands of our customers, who are experiencing their own pressures in the turbulence of the global marketplace.

Research and development of the Company’s human pharmaceutical products is coordinated at Dextran Products. 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. However, Phase III HIV clinical trials were cancelled in January of 2007 due to a higher than expected incidence of HIV. The New England Journal of Medicine published a report on the Phase III trial data indicating that product adherence was low among participants and concluded that cellulose sulphate may not have increased HIV transmission after all but also may not have an HIV preventative effect. In an article published in Obstetrics and Gynecology in March 2008, the lead researchers were quoted by Reuters Health as affirming that "Cellulose sulphate gel appears to be an effective vaginal contraceptive without many side effects" with data showing an approximate 96% effectiveness rate of pregnancy prevention when the product was used as directed. The researchers added, "With time and further research, this vaginal contraceptive may become an alternative to the nonoxynol-9 based contraceptive gels currently available in the U.S." 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. Management intends to pursue the development of cellulose sulphate as a contraceptive.
 

Cellulose sulphate has also been tested for its effect on bacterial vaginosis (BV). In 2007, the report outlining results from a BV trial concluded that although efficacy of cellulose sulphate in prevention of BV was not significant, there were significant questions about patient behavior and product adherence in that trial as well. At this time, management is not seeking to pursue continued development of cellulose sulphate for prevention of BV.

Results of Operations

The net loss for the third quarter of fiscal year 2009, as compared to the third quarter of fiscal year 2008, is primarily a result of the negative gross margin experienced during the period due to production issues, partially offset by the continuing decline in all aspects of the Company’s expenses. Expenses during the year to date of fiscal year 2008 were also offset by $79,684, which was due to the collection of the cash value of a life insurance policy during the second quarter of that fiscal year, discussed further below.

Sales for the third quarter of fiscal year 2009 remained consistent with sales for the third quarter of fiscal year 2008, though the volumes of liquid products declined significantly, especially in October, due primarily to lack of demand from customers affected by the depressed hog markets, and the general turmoil in the world economy. Sales for the nine months ended October 31, 2008 are lower compared to the nine months ended October 31, 2007 due to lower overall production volumes resulting from reduced demand.
 

The significant decrease in gross margin for the third quarter of fiscal year 2008 compared to the third quarter of fiscal year 2007 is primarily due to two production related factors. First, an equipment breakdown resulted in the loss of an expensive raw material. Second, environmental factors necessitated the reworking of a number of batches of powdered product, as well as the write off of unsatisfactory product. The production problems experienced in the third quarter of fiscal year 2009, as well as the decreased level of sales for the year to date of fiscal year 2009, compared to the year to date of fiscal year 2008, resulted in the decreased gross margin for fiscal year 2009.

The decrease during the third quarter and year to date of fiscal year 2008 in selling, promotion, general and administrative expenses is primarily due to a general decrease in the expenses of the Company, as well as the reduction in value of the Canadian dollar experienced the third quarter and year to date of fiscal year 2009. These reductions included legal, insurance, consulting and reporting costs, and are a result of the continued focus by management to minimize these costs.

Research and development expenditures have been reduced considerably in the third quarter and year to date of fiscal year 2009 compared to the same periods for fiscal year 2008, primarily as a result of the cessation of activities related to the Phase III clinical trials for Ushercell announced in January 2007. Included in the research and development expenditures for the nine months of fiscal year 2009 are legal expenses related to maintaining protection for the Company’s various existing patents.

The decrease in depreciation and amortization expense is a result of the decrease in capital expenditures for the third quarter of fiscal year 2009 compared to the third quarter of fiscal year 2008. The increase for the nine months ended October 31, 2008 is primarily due to the decreased average value of the Canadian dollar for the year to date of fiscal 2009 compared to the year to date for fiscal year 2008. Significant asset acquisitions related to the plant refurbishment have not been put into service and are therefore not yet being depreciated. These acquisitions are expected to be available by the end of the fourth quarter of fiscal year 2009.

Interest expense for the third quarter and year to date of fiscal year 2009 decreased from the comparative amount for the third quarter and year to date of fiscal year 2008 primarily due to the decrease in interest rates experienced in the current fiscal year.

The foreign exchange gain for the third quarter and year to date of fiscal year 2009 was due to the continued increase in value of the United States dollar compared to the Canadian dollar throughout these periods, especially in October 2008. This contrasts with the continued decline in value of the United States dollar relative to the Canadian dollar during the corresponding periods of fiscal year 2008. The gain in the third quarter of fiscal year 2009 is partially offset by the inclusion of a loss of US$22,597 related to foreign exchange forward contracts expiring in November and December 2008. At October 31, 2008, Dextran Products has a net asset exposure to the United States dollar because its liabilities denominated in United States dollars were less than its United States dollar denominated accounts receivable balances.

Liquidity and Capital Resources

As of October 31, 2008, the Company had cash and cash equivalents of $13,628, compared to cash and cash equivalents of $468,570 at January 31, 2008, and $538,736 at October 31, 2007. In the third quarter of fiscal year 2009 the Company utilized cash of $66,785 in its operating activities, compared to $154,881 for the third quarter of fiscal year 2008. The decrease in cash from operations during the third quarter of fiscal year 2009 was primarily due to the loss from operations during the period, as well as the decrease in accounts payable. Depreciation continues to be a large non-cash expense of the Company.

The Company’s working capital decreased to $1,763,737 and a working capital ratio of 2.77 to 1 as of October 31, 2008, compared to $2,403,042 and 3.43 to 1 as of January 31, 2008.

As of October 31, 2008, the Company had accounts receivable of $887,476 and inventory of $1,401,630, compared to $611,975 and $1,350,490 respectively at January 31, 2008 and $507,376 and $1,860,195 respectively at October 31, 2006. The increase in accounts receivable is due to the significant volume of sales which occurred late in the quarter, and the timing of customer payments.

At October 31, 2008, the Company had accounts payable of $375,304 compared to $399,820 at January 31, 2008 and $493,800 at October 31, 2007. The decrease in accounts payable was due to reductions in outstanding amounts related to the plant refurbishment and the timing of supplier payments.

During the third quarter of fiscal year 2009, capital expenditures totaled $52,250 as compared to $150,056 in the third quarter of fiscal year 2008. The expenditures for the third quarter of fiscal year 2008 were primarily for construction costs relating to the plant refurbishment at the Dextran Products plant in Toronto.

The change in accumulated other comprehensive income of the Company is primarily attributable to the currency translation adjustment of Dextran Products. Dextran Products’ functional currency is the Canadian dollar, which has depreciated compared to the United States dollar during the third quarter of fiscal year 2009. This currency translation adjustment arises from the translation of Dextran Products’ financial statements to U.S. dollars.

Dextran Products has a Cdn. $250,000 (U.S. $207,500) operating line of credit, of which Cdn. $190,000 was utilized at October 31, 2008 and nil January 31, 2008. This line of credit bears interest at the Canadian banks’ prime lending rate plus 1.00% (October 31, 2008 – 5.00%; January 31, 2008 – 6.50%). The line of credit is used periodically by the Company to cover temporary short-term Canadian dollar cash needs. For these short-term cash needs, the interest expense on the credit line is typically less than the transaction costs incurred in selling short-term investments. In May 2006 a fixed term rate loan of Cdn. $500,000 (U.S. $415,110) was obtained to fund capital purchases. The interest rate is 0.75% over Canadian bank prime lending rate (6.95%). Bank 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.

The decrease in long-term debt from January 31, 2008 is due to repayments during the period, while the increase in capital lease obligations is due to the acquisition of a photocopying system during the third quarter of fiscal year 2009. 

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.

Related Party Transactions

In August 1997, the Company loaned the late Thomas C. Usher, 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 prime rate of Toronto Dominion Bank 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, in the past, bonus payments, if any, granted to Thomas C. Usher as an employee of the Company. The amount outstanding under the Loan as of October 31, 2008 was $295,884, as compared to $297,321 at January 31, 2008, including accrued interest. The Company has taken a cumulative provision of $323,490 against accrued interest on this loan at October 31, 2008, and January 31, 2008. Obligations with respect to the Loan transferred to the estate of Thomas C. Usher upon his death in February 2005.

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 October 31, 2008 and January 31, 2008 was $60,339. The Company continues to be obligated to make royalty payments to Mr. Usher’s estate pursuant to intellectual property license agreements, and intends to continue to offset such payments against the Receivables. Thomas C. Usher also owed $250,000 to a subsidiary of the Company, Novadex International Limited, as of October 31, 2008, pursuant to a non-interest bearing loan with no specific repayment terms. The outstanding amount of this loan has not changed from January 31, 2008. The amounts continue to remain owing from the estate of Thomas C. Usher.

As of October 31, 2008, Thomas C. Usher, now through his estate, had pledged 243,263 common shares of the Company as security for these amounts owing to the Company. These common shares had a market value of $121,631 at October 31, 2008, based on the closing price of the Company’s common shares as quoted on the Pink Sheets quotation service on October 31, 2008. During the third quarter of fiscal year 2008, George G. Usher, Chief Executive Officer of the Company, purchased 27,500 shares of the Company from the estate for a cost of $16,500, based on the share market price at the time of purchase. Proceeds were used to reduce the shareholder loan owing to the Company. The Company intends to continue to hold the remaining pledged assets as collateral until the amounts owing discussed above are repaid.

The Company has 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 October 31, 2008 is $36,908.

The Company also has an outstanding loan payable to Ruth Usher, a former director and the widow of Thomas C. Usher. The amount due from the Company pursuant to this loan decreased to $618,411 at October 31, 2008 from $658,569 at January 31, 2008 due to monthly payments by the Company, less interest charges.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Critical Accounting Policies

The Company’s interim 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 a 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 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 creditworthiness 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 two fiscal years.

Long-Lived Assets

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, a subsidiary of Chemdex, Inc. and Sparhawk entered into a 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.

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.

On May 31, 2006, payment in full for principal and interest of the promissory note 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.

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 effect on reported income.

Exchange Rate Sensitivity

The Company’s operations consist primarily of manufacturing activities located in Toronto, 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 consolidated 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 loss when the Canadian dollar rises in relation to the United States dollar because it has a net asset exposure to the United States dollar resulting from accounts receivables denominated in United States dollars exceeding United States dollar denominated accounts payable and customer deposits. Similarly, a decline in the Canadian dollar relative to the United States dollar results in a foreign exchange gain and increased gross margins and net income at Dextran Products.

Management monitors currency fluctuations and endeavors 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.

Interest Rate Sensitivity

The Company has interest earning assets consisting of investment grade short-term 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 by the shareholder loan receivable. Both of these financial instruments carry the same interest rate. As such, the Company has a reduced level of 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.

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. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in alerting them on a timely basis of material information relating to the Company (including its consolidated subsidiaries) required to be included in its periodic Securities and Exchange Commission filings.

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 fiscal quarter ended October 31, 2008 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company is not a party to any pending legal proceedings.

Not applicable.

Not applicable.

Submission of Matters to a Vote of Security Holders.

None

None.

(a) Exhibits

(b)

Reports on Form 8-K

Not applicable.
 

SIGNATURES

Pursuant to the requirements 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.

Date:

December 12, 2008