<PAGE>   1

                                                                      Exhibit 13

SHAREHOLDER INFORMATION.

Market for the Company's Common Shares and Related Shareholder Matters. The
Company's Common Shares are listed for trading on the NASDAQ SmallCap Market
under the symbol POLXF, and on the Boston Stock Exchange under the symbol PXL.

The reported high and low bid prices of the Company's Common Shares on the
NASDAQ SmallCap Market for the past two calendar years were as follows (similar
prices were quoted on the Boston Stock Exchange):
<TABLE>
<CAPTION>

Stock Price                          (Low and High Bid*)
Quarter Ended                1998             1997              1996
<S>                          <C>              <C>               <C>      
March 31                     4.125-4.250      7.190-7.810       10.313-11.250
June 30                                       6.250-6.500       9.375-9.688
September 30                                  9.750-10.000      8.125-8.750
December 31                                   6.813-7.438       7.188-8.438
<FN>

*As adjusted to reflect the Company's completion on June 19, 1997 of a
one-for-ten reverse stock split of its Common Shares and Class B Preferred
Shares.
</TABLE>

The quotations set out above represent prices for the specific dates between
dealers and do not include retail mark-up, mark-down or commission. They do not
represent actual transactions. These quotations have been supplied by the
National Association of Securities Dealers, Inc.

As at March 31, 1998 there were approximately 829 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.

There are no governmental laws, decrees or regulations in the Commonwealth of
the Bahamas applicable to the Registrant that restrict the export or import of
capital, including foreign exchange controls, or that affect the remittance of
dividends or other payments to non-resident holders of the Registrant's Common
Shares.  Furthermore, there is no reciprocal tax treaty between the
Commonwealth of the Bahamas and the United States regarding withholding, and
U.S. holders of the Registrant's Common Shares are not subject to taxes under
Bahamian law.

Form 10-K and Further Information.

The Company's Annual Report on Form 10-K is available free of charge and can be
obtained by contacting Polydex Pharmaceuticals Limited.

Polydex will be pleased to respond to all inquiries not involving proprietary or
confidential information. All inquiries and contacts from investors, securities
analysts, other members of the financial community and the news media should be
directed to:

Debbie MacAskill,
Dextran Products Limited, 421 Comstock Road, Toronto, Ontario, Canada. M1L 2H5.
Tel: 416-755-2231.                  Fax: 416-755-0334.
<PAGE>   2

FINANCIAL HIGHLIGHTS.
For the fiscal years ended January 31 (Expressed in U.S. dollars)
<TABLE>
<CAPTION>

                                                       1998          1997           1996           1995             1994

<S>                                                <C>           <C>           <C>            <C>              <C>        
SALES FROM CONTINUING OPERATIONS                   $ 9,842,365   $ 9,344,089   $ 8,459,563    $ 7,254,913      $ 6,970,405
COMPONENTS OF NET INCOME (LOSS):
        From continuing operations                     488,162       122,390    (1,165,534)    (1,034,622)      (1,275,371)
        From discontinued operations                      --            --            --             --               --

        Extraordinary items                               --            --            --             --               --

        Net income (loss) for the year                 488,162       122,390    (1,165,534)    (1,034,622)      (1,275,371)
INCOME (LOSS) PER COMMON SHARE (1):
        From continuing operations before
            extraordinary items                           0.17          0.04         (0.42)         (0.37)           (0.50)
        From continuing operations after
            extraordinary items                           0.17          0.04         (0.42)         (0.37)           (0.50)
        Income (loss) for the year                        0.17          0.04         (0.42)         (0.37)           (0.50)
TOTAL ASSETS                                         9,740,947     8,627,517     8,064,990      8,412,596        8,182,257
LONG-TERM BORROWINGS                                 1,478,578     1,555,551     1,633,041        821,179          905,728
</TABLE>
-----------------
(1) In 1998, the Company retroactively adopted the Statement of Financial
    Accounting Standards Number 128 "Earnings per share" issued in February
    1997 relating to the presentation of earnings per share. 

<PAGE>   3



Management's Discussion and Analysis of Financial Condition and Results of
Operations.

The Company's fiscal year ends on January 31st therefore fiscal year 1998 refers
to the year ended January 31, 1998.

1998 COMPARED TO 1997
---------------------
Sales increased 5% or $498,276 to $9,842,365 in fiscal 1998 from $9,344,089 in
fiscal 1997. The growth in sales was primarily due to a greater volume at
Veterinary Laboratories Inc. ("Vet Labs"), where sales increased by 15% or
$789,247 to $5,931,781 in fiscal 1998 from $5,142,534 in fiscal 1997, and
accounted for 60% and 55% of the Company's sales in fiscal 1998 and 1997,
respectively. This increase was primarily attributable to increased sales of
Injectable Iron Dextran and the addition of two new injectable vitamin products.

Management expects to continue its efforts to streamline the Vet Labs product
line by discontinuing low margin items and replacing them with products that
generate higher margins.

Sales at Dextran Products Limited ("Dextran Products") decreased slightly by 7%
or $290,971 to $3,910,584 in fiscal 1998 from $4,201,555 in fiscal 1997, and
accounted for 40% and 45% of the Company's sales in fiscal 1998 and 1997,
respectively. This decrease was primarily attributable to Dextran Products
drying equipment being refurbished over a period of three months thereby
reducing the sales of one of the more profitable products. A reduction in the
value of the Canadian dollar relative to the U.S. dollar accounted for almost 1%
of this decrease in sales.

Management expects the sales trend at Dextran Products to reverse due to the
drying equipment now producing an improved product and the reintroduction of a
product that had been previously discontinued.

The Company's gross profit increased 22% or $530,196 to $2,984,226 in fiscal
1998 from $2,454,030 in fiscal 1997. As a percentage of sales, gross profit
increased to 30% from 26% in fiscal 1997. This was mainly due to the performance
of both Dextran Products and Vet Labs as discussed below.

Dextran Products' gross profit increased 3% or $40,485 to $1,632,074 in fiscal
1998 from $1,591,589 in fiscal 1997. As a percentage of sales, gross profit
increased to 42% from 38% in fiscal 1997. Last year we reported a gross profit
figure of 45%, but this included the profit on intercompany sales. Intercompany
shipments have become significant and so they have been removed from the gross
profit calculation. The primary reason for the increase in gross profit was
sales of more profitable products and a reduction in certain overhead costs.
Overhead for fiscal 1997 was higher due to, among other things, the renovations
that were undertaken. The rise in margins was also partly due to the effect of
exchange rates given that Dextran Products costs are incurred in Canadian
dollars, but the majority of its sales are in U.S. dollars. Therefore if the
Canadian dollar drops in relation to the U.S. dollar, margins 


<PAGE>   4

increase. In fiscal 1998 such currency fluctuations resulted in a further 1.3%
increase in margins in addition to a 2% increase for fiscal 1997. Management
does not believe there will be a similar increase in margins for fiscal 1999,
but does believe the margins will remain steady at this level.

Vet Labs' gross profit increased 51% or $296,587 to $877,106 in fiscal 1998 from
$580,519 in fiscal 1997. As a percentage of sales, gross profit increased to 15%
from 11% in fiscal 1997. This rise was primarily attributable to the increased
market penetration of Injectable Iron Dextran and the introduction of two new
injectable products which are more profitable than the other products
manufactured. It is also partly due to the continued elimination of certain low
margin products. Management expects to continue its efforts to streamline the
Vet Labs product line by discontinuing low margin products and replacing them
with products that generate higher margins. Management believes that margins
will continue to improve in fiscal 1999.

Selling, promotion, general and administrative expenses increased by 33% to
$2,001,865 in fiscal 1998 from $1,501,581 in fiscal 1997 due in part to (i)
costs associated with a marketing contract entered into in preparation for a new
product, (ii) the first full year of salary for former Chairman, Dr. Alec Keith,
(iii) corporate expenses associated with the Company's June 1997 reverse stock
split, and (iv) preparation of Exchange Act reports in accordance with the SEC's
new electronic filing system. As a percentage of sales, selling, promotion,
general, and administrative expenses increased to 20% in fiscal 1998 from 16% in
fiscal 1997.

Research and development expenses increased by 101% or $92,838 to $184,901 in
fiscal 1998 from $92,063 in fiscal 1997 due mainly to increased in house
research in the area of Cellulose Sulphate and new product development. The
Company conducts its research through collaborations with the Rush Institute and
the University of British Columbia. These institutes received additional funding
from government sources during fiscal 1998 reducing the Company's cash
requirements. Although continued government funding is never certain, the
Company expects that this funding should continue due to the success of the work
to date.

Interest expense decreased by 15% or $22,264 to $129,199 in fiscal 1998 from
$151,463 in fiscal 1997. This decrease is mainly due to the repayment of a loan
due to an officer, director and major shareholder (the "Major Shareholder")
during the year and the renegotiation of the mortgage payable at Dextran
Products. Interest and other non-operating income increased by 3% or $1,684 to
$58,313 in fiscal 1998 from $56,629 in fiscal 1996.

Unusual Items
The Company recorded a tax recovery in fiscal 1998 of $936,042 compared with a
tax expense in fiscal 1997 of $12,481. The Company utilized Canadian tax loss
carryforwards and discretionary tax deductions to shelter approximately $556,000
of taxes that would have been payable in Canada. The Company reduced the
valuation allowance by an additional $950,000. The tax recovery in fiscal 1998
is a result of (i) the sustained profitability of the Canadian operations, (ii)
the resulting ability to utilize previously unrecorded tax losses and deductions
and (iii) the expectations for continued profitability of the Canadian
operations in the future.  The Company does not expect a similar recovery next
year and expects that it will likely incur a tax provision as the deferred tax
asset is reduced due to 

<PAGE>   5

expected profitability of the Canadian operations. If the Company's United
States operations are able to demonstrate sustained profitability in future
years, a similar adjustment to the valuation allowance may be required relating
to the tax losses in the United States.

In fiscal 1996, the Company purchased a patent relating to the production of
Cellulose Sulphate, which had a number of potential applications including the
production of photographic film and use in contraceptives. The patents were
capitalized in fiscal 1996 as a result of their potential application in the
areas of photographic film because their use in contraceptives was considered to
be research and development due to the risks associated with obtaining
regulatory approval for any product developed. During fiscal 1998, the Company
determined that the slow commercialization of the applications in photographic
film was an indication of impairment in the carrying value as it related to this
application. Although the Company continues to pursue the photographic
applications and more importantly the applications in contraceptives with the
Rush Institute as described above, the Company believed it would be appropriate
to write-down these assets by $608,994. The Company does not expect a similar
charge in future years.

As a result of the foregoing, the Company recorded net income of $488,162 in
fiscal 1998 as compared to a net income of $122,390 in fiscal 1997.



1997 COMPARED TO 1996
---------------------
Sales increased 10% or $884,526 to $9,344,089 in fiscal 1997 from $8,459,563 in
fiscal 1996. The growth in sales was primarily due to a greater volume at
Dextran Products where sales rose by 29% or $952,523 to $4,201,555 in fiscal
1997 from $3,249,032 in fiscal 1996 and accounted for 45% and 38% of the
Company's sales in fiscal 1997 and 1996, respectively. This increase was
primarily attributable to increased sales of Iron Dextran 20% and Dextran
Sulphate and a new application for Iron Dextran in the feed supplement industry.
Half way through the year Dextran Products raised prices 7% to cover increased
raw material prices over the last three years, and so a small portion of this
increase in sales can be attributed to the new prices.

Management expects this sales trend to continue although perhaps not at the same
rate, due to continued increased market penetration in the Pacific Rim and the
activities of new customers in Europe.

Sales at Vet Labs decreased slightly by 1% or $67,997 to $5,142,534 in fiscal
1997 from $5,210,531 in fiscal 1996, and accounted for 55% and 62% of the
Company's sales in fiscal 1997 and 1996, respectively. The decrease was
primarily attributable to a $713,000 reduction in sales following Vet Labs'
cancellation of a manufacturing agreement with one customer which generated very
low margins. This decrease in sales was nearly offset by the increased sales
volume of injectables at much larger margins. Management expects to continue its
effort to streamline the product line by discontinuing low margin items and
replacing them with products that generate larger margins.



<PAGE>   6

The Company's gross profit increased 60% or $920,773 to $2,454,030 in fiscal
1997 from $1,533,257 in fiscal 1996. As a percentage of sales, gross profit
increased to 26% from 18% in fiscal 1996. This was mainly due to the performance
of Dextran Products as explained below.

Dextran Products' gross profit increased 69% or $762,057 to $1,873,511 in fiscal
1997 from $1,111,454 in fiscal 1996. As a percentage of sales, gross profit
increased to 45% from 34% in fiscal 1996. The primary reason for the increase
was that Dextran Products reorganized its operating process to increase volume
without affecting fixed costs. Also late in fiscal 1996 Dextran Products
purchased its building in Toronto and consolidated its operations from two
buildings into one resulting in a reduction in fixed overhead costs. Rent paid
in fiscal 1996 amounted to $116,592. Depreciation and interest relating to the
building are not included in the cost of sales, thus increasing the margin
relative to the prior years. The yearly mortgage interest for fiscal 1997 was
$20,690 and annual building depreciation was $3,471, and in fiscal 1998 these
numbers are expected to be $12,635 and $30,785, respectively. The rise in
margins was also partly due to the effect of exchange rates because Dextran
Products costs are incurred in Canadian dollars, but the majority of its sales
are in U.S. dollars. Therefore if the Canadian dollar drops in relation to the
U.S. dollar, margins increase and in fiscal 1997 this resulted in a 2% increase
in margins. Dextran Products also increased its prices midway through the year
by 7%, and so this benefited margins for part of the year. Certain equipment was
purchased during the year which increased batch sizes without increasing fixed
costs and so improved margins. Management does not believe there will be a
similar increase in margins for fiscal 1998, but does believe the margins will
remain steady at this level.

Vet Labs' gross profit increased 38% or $158,716 to $580,519 in fiscal 1997 from
$421,803 in fiscal 1996. As a percentage of sales, gross profit increased to 11%
from 8% in fiscal 1996. This rise was primarily attributable to the
discontinuance of certain low margin products and the cancellation of a
manufacturing contract with one customer where the work generated significant
sales but extremely low margins. Management expects to continue its efforts to
streamline the product line by discontinuing low margin products and replacing
them with products that generate greater margins and management believes that
for fiscal 1998 margins will continue to improve.

Selling, promotion, general and administrative expenses increased by 13% to
$1,501,581 in fiscal 1997 from $1,331,101 in fiscal 1996 due in part to variable
expenses associated with the higher sales volume. As a percentage of sales,
selling, promotion, general, and administrative expenses were 16% in fiscal 1997
and 1996.

Research and development expenses decreased by 71% or $222,086 to $92,063 in
fiscal 1997 from $314,149 in fiscal 1996. The Company conducts its research
through collaborations with the Rush Institute and the University of British
Columbia. These institutes received additional funding from government sources
during fiscal 1997 reducing the Company's cash requirements. Although continued
government funding is never certain, the Company expects that this funding
should continue due to the success of the work to date.

Interest expense increased by 15% or $20,204 to $151,463 in fiscal 1997 from
$131,259 in fiscal 1996. This increase resulted primarily from Dextran Products
obtaining a mortgage for the purchase of its Toronto facility. Interest and
other non-operating income decreased by 

<PAGE>   7

26% or $19,609 to $56,629 in fiscal 1997 from $76,238 in fiscal 1996. This
decrease was primarily attributable to the Major Shareholder repaying his loan
due to the Company.

The Company's effective tax rate was 9.3% and 0.58% for fiscal 1997 and 1996
respectively, due to the utilization of previously unrecognized tax losses.

As a result of the foregoing, the Company recorded net income of $122,390 in
fiscal 1997 as compared to a net loss of $1,165,534 in fiscal 1996.


LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
For fiscal 1998 the Company generated cash of $196,489 from its operating
activities compared to $174,258 for fiscal 1997. This increase was primarily
attributable to an increase of net income and a reclassification of certain
items to more truly reflect the activities of the Company. The Company
maintained $1,552,100 of working capital and a current ratio of 2.10:1 as of
January 31, 1998 compared to $1,494,510 of working capital and a current ratio
of 1.96:1 as of January 31, 1997.

At January 31, 1998, the Company had accounts receivable of $932,745 and
$1,678,280 in inventory compared to $1,107,829 and $1,279,280, respectively, at
January 31, 1997. The decrease in accounts receivable was due to the timing of
accounts receivable payments at Dextran Products. Inventories were increased in
anticipation of higher first quarter sales and to allow for any production
interruptions during the anticipated plant refurbishment at Dextran Products. In
the last quarter of fiscal 1997, significant sales were experienced resulting in
an increase in receivables still outstanding at year end.

The Company is currently reviewing alternatives to address the potential
requirement on March 15, 1999, to repurchase up to $2.0 million of the common
shares held by Continental Grain Company ("CGC"). Although management expects
that a portion of this obligation could be funded from existing cash and cash
generated from operations during the next year, it is reasonably possible that
the Company will be required to obtain additional financing, such as increased
operating or term borrowing facilities or issuance of additional share capital
or alternatively will be required to re-negotiate the terms of the obligation.
CGC has expressed a willingness to review the terms of the agreement.

Dextran Products has a CDN$100,000 line of credit of which there were no
outstanding borrowings as of January 31, 1998. Pending bank approval, Dextran
Products expects to increase its line of credit to CDN$300,000 in the second
quarter of fiscal 1999. Management anticipates using the increased credit line
for the purposes of funding a portion of the costs associated with the
refurbishment of the Toronto facility. Vet Labs has a $400,000 line of credit.
At January 31, 1998, there were outstanding borrowings of $362,532 under this
line of credit and the interest rate was 10.5%. Vet Labs also has a loan
commitment for $300,000 to be used for the construction of a 12,000 square foot
production and warehouse addition. Management has decided to delay construction
until further growth warrants additional space.

<PAGE>   8

The Company anticipates that it can satisfy its fiscal 1999 operating
requirements from cash generated from operating activities. If it cannot, the
Company expects that, as in prior years, it will be able to meet its operating
requirements through additional loans from and/or private sales of its common
stock to principal shareholders or entities controlled by them or to unrelated
parties. The Company, at present, does not have any material commitments for
capital expenditures.

Dextran Products has ongoing research commitments with the University of British
Columbia to investigate the use of a special form of Dextran to combat the
effects of cystic fibrosis. The Company is in preliminary discussions with
certain companies about further financing or forming an alliance to further this
research through clinical trials and to market but the results of these
discussions are indeterminable at this time.

The Company is in preliminary discussions with certain companies to fund the
further research necessary to commercialize the Cellulose Sulphate product but
the results of these discussions are indeterminable at this time.

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 U.S. 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 on
its operations are material.


YEAR 2000 COMPUTER ISSUES.
--------------------------
The Company has analyzed the impact of Year 2000 computer issues and does not
believe there will be an adverse effect on the Company's core business
operations and expects that transactions with customers, suppliers, corporate
partners and financial institutions will be fully supported. While the Company
believes its planning and preparations will be adequate and complete well in
advance of the Year 2000, there can be no assurance that the systems of
suppliers and other companies on which the Company relies will be converted on a
timely basis and will not have a material adverse effect on the Company. The
cost of the Year 2000 initiative is not expected to be material to the Company's
results of operations or financial position.


Forward-looking Statements Safe Harbor.
This Annual Report, including the Management's Discussion and Analysis, contains
various "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and 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
management's expectations of regulatory approval and the commencement of sales,
and the sufficiency of the Company's cash flow for the Company's future
liquidity and capital resource needs. In addition, statements containing
expressions such as "believes", "anticipates" or "expects" used in this Annual
Report and the Company's periodic reports on Forms 10-K and 10-Q filed with the
Securities and Exchange


<PAGE>   9

Commission are intended to identify forward-looking statements. The Company
cautions that these and similar statements in this Annual Report and in
previously filed periodic reports including reports filed on Forms 10-K and 10-Q
are further qualified by important factors that could cause actual results to
differ materially from those in 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, FDA approval and market acceptance of the Company's products, none
of which can be assured. Results actually achieved may differ materially from
expected results included in these statements as a result of these or other
factors.






<PAGE>   10
                                     CONSOLIDATED FINANCIAL STATEMENTS

                                     POLYDEX PHARMACEUTICALS LIMITED
                                     [Expressed in United States dollars]


                                     YEARS ENDED JANUARY 31, 1998, 1997 AND 1996


<PAGE>   11




                                AUDITORS' REPORT





To the Shareholders of
POLYDEX PHARMACEUTICALS LIMITED

We have audited the consolidated balance sheets of POLYDEX PHARMACEUTICALS
LIMITED as at January 31, 1998 and 1997 and the related consolidated statements
of shareholders' equity, operations and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the consolidated financial position of POLYDEX
PHARMACEUTICALS LIMITED as at January 31, 1998 and 1997 and the consolidated
results of its operations and its cash flows for the years then ended in
accordance with accounting principles generally accepted in the United States.





ERNST & YOUNG
Toronto, Canada,
March 13, 1998.                                            Chartered Accountants
<PAGE>   12

<TABLE>
<CAPTION>

POLYDEX PHARMACEUTICALS LIMITED

                           CONSOLIDATED BALANCE SHEETS
                      [Expressed in United States dollars]

As at January 31

                                                                          1998               1997
                                                                            $                  $
-----------------------------------------------------------------------------------------------------

ASSETS
CURRENT
<S>                                                                  <C>                <C>    
Cash [note 7]                                                          288,527            603,491
Trade accounts receivable                                              932,745          1,107,829
Inventories [note 3]                                                 1,678,280          1,279,280
Prepaid expenses and other current assets                               64,727             63,312
-----------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                 2,964,279          3,053,912
Property, plant and equipment, net [note 4]                          3,800,379          3,857,302
Patents, net [notes 5 and 6]                                           217,374            877,311
Due from Novadex Corp. [note 6]                                        712,185            765,209
Due from shareholders [note 6]                                         935,416                 --
Deferred income taxes [note 14]                                        950,000                 --
Other assets                                                           161,314             73,783
-----------------------------------------------------------------------------------------------------
                                                                     9,740,947          8,627,517
-----------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable                                                     1,001,620          1,027,109
Accrued liabilities                                                    355,167            472,108
Current portion of long-term debt [note 8]                              55,392             60,185
-----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                            1,412,179          1,559,402
Long-term debt [note 8]                                                462,632            524,656
Due to shareholders [note 6]                                           590,526            605,475
Due to affiliated companies [note 6]                                   425,420            425,420
Deferred gain [note 9]                                                 672,369            776,564
Deferred income taxes [note 14]                                         26,439             12,481
Minority interest [note 6]                                                  --             22,791
-----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES                                                    3,589,565          3,926,789
-----------------------------------------------------------------------------------------------------
Related party transactions [notes 6 and 12]
Commitments and contingencies [notes 9 and 11]
Redeemable capital stock [note 11]                                   2,000,000          2,000,000
SHAREHOLDERS' EQUITY
Capital stock [notes 10 and 11]
Authorized
   100,000 A preferred shares of $0.10 each 
   899,400 B preferred shares of $0.0167 each 
   4,000,000 common shares of $0.0167 each
Issued and outstanding
   899,400 B preferred shares                                           15,010             15,010
   2,846,998 common shares [1997 -2,675,319]                            47,283             44,456
Contributed surplus                                                 21,826,025         20,735,822
Deficit                                                            (17,071,168)       (17,559,330)
Currency translation adjustments                                      (665,768)          (535,230)
-----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY                                           4,151,382          2,700,728
-----------------------------------------------------------------------------------------------------
                                                                     9,740,947          8,627,517
-----------------------------------------------------------------------------------------------------

See accompanying notes

</TABLE>

<PAGE>   13

<TABLE>
<CAPTION>

POLYDEX PHARMACEUTICALS LIMITED

                           CONSOLIDATED STATEMENTS OF
                              SHAREHOLDERS' EQUITY
                      [Expressed in United States dollars]


Years ended January 31, 1998, 1997 and 1996




                                                                                      CURRENCY         TOTAL
                                    PREFERRED    COMMON     CONTRIBUTED              TRANSLATION   SHAREHOLDERS'
                                     SHARES      SHARES       SURPLUS      DEFICIT   ADJUSTMENTS      EQUITY
                                        $           $            $            $           $              $
--------------------------------------------------------------------------------------------------------------

<S>                                  <C>         <C>        <C>          <C>           <C>          <C>        
BALANCE, JANUARY 31, 1995             4,990      46,609     22,573,669   (16,516,186)  (463,689)    5,645,393  
                                                                                                               
Common shares issued for                                                                                       
   services provided                     --          16          9,984            --         --        10,000  
Preferred shares issued to                                                                                     
   repay shareholder loan            10,020          --             --            --         --        10,020  
Net loss for the year                    --          --             --    (1,165,534)        --    (1,165,534) 
Currency translation                                                                                           
   adjustment                            --          --             --            --    (59,162)      (59,162) 
---------------------------------------------------------------------------------------------------------------        
BALANCE, JANUARY 31, 1996            15,010      46,625     22,583,653   (17,681,720)  (522,851)    4,440,717  
                                                                                                               
Exercise of options                      --         334        149,666            --         --       150,000  
Net income for the year                  --          --             --       122,390         --       122,390  
Currency translation                                                                                           
   adjustment                            --          --             --            --    (12,379)      (12,379) 
Renegotiation of Vet Labs                                                                                      
   agreement [note 11]                   --      (2,503)    (1,997,497)           --         --    (2,000,000) 
---------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 1997            15,010      44,456     20,738,822   (17,559,330)  (535,230)    2,700,728  
                                                                                                               
Exercise of options for                                                                                        
   services provided                     --          40         17,990            --         --        18,030  
Common shares issued for cash                                                                                  
   through private placement             --       2,661        997,339            --         --     1,000,000  
Common shares issued for interest                                                                              
   in Novadex International, Inc.        --         126         74,874            --         --        75,000  
Net income for the year                  --          --             --       488,162         --       488,162  
Currency translation                                                                                           
   adjustment                            --          --             --            --   (130,538)     (130,538) 
---------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 1998            15,010      47,283     21,826,025   (17,071,168)  (665,768)    4,151,382  
---------------------------------------------------------------------------------------------------------------
                                                                            
See accompanying notes
</TABLE>
<PAGE>   14
<TABLE>
<CAPTION>


POLYDEX PHARMACEUTICALS LIMITED

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      [Expressed in United States dollars]


Years ended January 31




                                                       1998              1997               1996
                                                         $                 $                  $
-----------------------------------------------------------------------------------------------------

<S>                                                <C>               <C>                <C>      
SALES                                              9,842,365         9,344,089          8,459,563
Cost of goods sold                                 6,858,139         6,890,059          6,926,306
-----------------------------------------------------------------------------------------------------
GROSS MARGIN                                       2,984,226         2,454,030          1,533,257
-----------------------------------------------------------------------------------------------------

EXPENSES
Selling and promotion                                402,610           159,694            143,072
General and administrative                         1,599,255         1,341,887          1,188,029
Depreciation and amortization                        566,642           630,825            551,306
Interest [note 6]                                    129,199           151,463            131,259
Research and development [note 12]                   184,901            92,063            314,149
Write-down of property, plant and
   equipment and patents [note 5]                    608,994                --             40,000
-----------------------------------------------------------------------------------------------------
                                                   3,491,601         2,375,932          2,367,815
-----------------------------------------------------------------------------------------------------
Income (loss) from operations                       (507,375)           78,098           (834,558)
-----------------------------------------------------------------------------------------------------
Other income (expenses)
   Write-down of long-term investment [note 13]           --                --           (400,000)
   Gain (loss) on sale of equipment                       --                --             (2,529)
   Interest and other [note 6]                        58,313            56,629             76,238
-----------------------------------------------------------------------------------------------------
                                                      58,313            56,629           (326,291)
-----------------------------------------------------------------------------------------------------
Income (loss) before income tax provision and
   minority interest                                (449,062)          134,727         (1,160,849)
Income tax recovery (provision) [note 14]            936,042           (12,481)            (6,750)
Minority interest                                      1,182               144              2,065
-----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) FOR THE YEAR                       488,162           122,390         (1,165,534)
-----------------------------------------------------------------------------------------------------

PER SHARE INFORMATION
Earnings (loss) per common
   share for the year - basic                         $0.17              $0.04             $(0.42)
                      - diluted                       $0.17              $0.04             $(0.42)
-----------------------------------------------------------------------------------------------------

Weighted average number of common shares
   outstanding for the year                        2,923,864         2,817,718          2,804,593
-----------------------------------------------------------------------------------------------------

See accompanying notes
</TABLE>


<PAGE>   15

<TABLE>
<CAPTION>

POLYDEX PHARMACEUTICALS LIMITED

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      [Expressed in United States dollars]


Years ended January 31

                                                            1998              1997               1996
                                                              $                 $                  $
---------------------------------------------------------------------------------------------------------

OPERATING ACTIVITIES
<S>                                                        <C>               <C>             <C>         
Net income (loss) for the year                             488,162           122,390         (1,165,534) 
Add (deduct) items not affecting cash                                                                    
   Depreciation and amortization                           566,642           630,825            551,306  
   Deferred income taxes                                  (936,042)           12,481                 --  
   Legal expenses charged to deferred gain [note 9]       (104,195)         (101,848)                --  
   Royalty expense and interest income charged to                                                        
     due from Novadex Corp.                                 53,024            73,702                 --  
   Write-down of property, plant and                                                                     
     equipment and patents                                 608,994                --             40,000  
   Write-down of long-term investment                           --                --            400,000  
   Loss (gain) on sale of equipment                             --                --              2,529  
   Minority interest                                        (1,182)             (144)            (2,065) 
   Expenses paid by issuance of common shares               18,030                --             10,000  
Net change in non-cash working capital                                                                   
   balances related to operations [note 15]               (496,944)         (563,148)           211,971  
---------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES                      196,489           174,258             48,207  
---------------------------------------------------------------------------------------------------------
                                                                                                         
INVESTING ACTIVITIES                                                                                     
Proceeds from sale of investment in                                                                      
   Novatek International Inc.                                   --         1,278,412                 --  
Additions to property, plant and equipment                (401,415)         (838,960)          (568,678) 
Additions to patents                                        (1,278)           (4,187)            (8,207) 
Advances to shareholders, net                             (935,416)               --                 --  
Proceeds from sale of equipment                                 --                --              5,087  
Cash acquired on acquisition of                                                                          
   Novedex International Inc.                                   --                --            250,000  
---------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES          (1,338,109)          435,265           (321,798)
---------------------------------------------------------------------------------------------------------
                                                                                                         
FINANCING ACTIVITIES                                                                                     
Repayment of loan payable                                       --           (10,000)                --  
Repayment of long-term debt                                (66,817)          (52,085)           (36,226) 
Proceeds from long-term debt                                    --                --            213,968  
Repayment of advances from shareholders, net               (14,949)          106,683            120,958  
Repayment to Novadex Corp.                                      --                --            (40,913) 
Private placement of common shares                       1,000,000                --                 --  
---------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES                      918,234            44,598            257,787  
---------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash                    (91,578)          (62,951)          (107,070) 
---------------------------------------------------------------------------------------------------------
                                                                                                         
NET INCREASE (DECREASE) IN CASH DURING THE YEAR           (314,964)          591,170           (122,874) 
Cash, beginning of year                                    603,491            12,321            135,195  
---------------------------------------------------------------------------------------------------------
CASH, END OF YEAR                                          288,527           603,491             12,321  
---------------------------------------------------------------------------------------------------------
                                                         
See accompanying notes
</TABLE>


<PAGE>   16


POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States dollars]


Years ended January 31, 1998, 1997 and 1996




1. GENERAL

Polydex Pharmaceuticals Limited ["Polydex" or the "Company"] is incorporated in
the Commonwealth of the Bahamas and its principal business activities, carried
on through subsidiaries, include the manufacture and sale of veterinary
pharmaceutical products and specialty chemicals. The Company prepares its
financial statements on the basis of accounting principles generally accepted in
the United States.


2. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION

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

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred and are stated net of
research and development grants received.

INVENTORIES

Inventories are stated at the lower of cost and net realizable value, cost being
determined on a first-in, first-out basis.

DEPRECIATION AND AMORTIZATION

Depreciation on property, plant and equipment 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 are amortized using the straight-line method over their estimated useful
lives of ten years.


                                                                              
<PAGE>   17
POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States dollars]


Years ended January 31, 1998, 1997 and 1996


REVENUE RECOGNITION

Revenue from sales of manufactured products is recognized upon shipment to
customers.

FOREIGN CURRENCY TRANSLATION

The functional currency of the Company's Canadian operations has been determined
to be Canadian dollars. All asset and liability accounts of these companies have
been translated into United States dollars using the current exchange rates at
the balance sheet dates. Income statement amounts have been translated using the
average exchange rates for the year. The gains and losses resulting from the
change in exchange rates from the beginning to the end of the year have been
reported separately as a component of shareholders' equity.

STOCK OPTIONS

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ["APB 25"] and related
Interpretations in accounting for its employee stock options rather than the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ["SFAS
123"]. Under APB 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles ["GAAP"] requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period.


<PAGE>   18
POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States dollars]


Years ended January 31, 1998, 1997 and 1996




EARNINGS PER COMMON SHARE

In 1998, the Company retroactively adopted the Statement of Financial Accounting
Standards Number 128 "Earnings per share" issued in February 1997 relating to
the presentation of earnings per share for 1998, 1997 and 1996. The impact of
adopting this standard was not material to the presentation of earnings per
share for all years.

Basic earnings per common share is computed using the weighted average number of
shares outstanding. Diluted earnings 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. Incremental shares of 5,880, 8,712 and 128 in 1998, 1997
and 1996 respectively, were used in the calculation of diluted earnings per
common share. Options to purchase 151,096, 196,500 and 295,077 shares of common
stock in 1998, 1997 and 1996, respectively, were not included in the computation
of diluted earnings per common share because the option exercise price was
greater than the average market price of the common stock.

3. INVENTORIES

Inventories consist of the following:
<TABLE>
<CAPTION>

                                                                         1998               1997
                                                                           $                  $
-----------------------------------------------------------------------------------------------------

<S>                                                                    <C>                <C>    
Finished goods                                                         937,686            656,039
Work-in-process                                                         77,828             89,640
Raw materials                                                          662,766            533,601
-----------------------------------------------------------------------------------------------------
                                                                     1,678,280          1,279,280
-----------------------------------------------------------------------------------------------------
</TABLE>


<PAGE>   19
POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States dollars]


Years ended January 31, 1998, 1997 and 1996



4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>

                                              1998                               1997
                                ------------------------------     ----------------------------------
                                        ACCUMULATED       NET                ACCUMULATED      NET
                                       DEPRECIATION/    BOOK                DEPRECIATION/    BOOK
                               COST    AMORTIZATION     VALUE      COST     AMORTIZATION    VALUE
                                  $          $             $          $           $            $
-----------------------------------------------------------------------------------------------------

<S>                          <C>          <C>       <C>         <C>         <C>         <C>      
Land and buildings           2,887,235    380,003   2,507,232   2,796,935     239,817   2,557,118
Machinery and equipment      5,146,907  3,853,760   1,293,147   5,077,720   3,777,536   1,300,184
-----------------------------------------------------------------------------------------------------
                             8,034,142  4,233,763   3,800,379   7,874,655   4,017,353   3,857,302
-----------------------------------------------------------------------------------------------------

5. PATENTS

Patents consist of the following:
<CAPTION>

                                                                         1998               1997
                                                                           $                  $
-----------------------------------------------------------------------------------------------------

<S>                                                                    <C>              <C>      
Cost                                                                   410,835          1,184,555
   Less accumulated amortization                                       193,461            307,244
-----------------------------------------------------------------------------------------------------
                                                                       217,374            877,311
-----------------------------------------------------------------------------------------------------
</TABLE>

The Company's patents relate to products for which there is significant
competition. Although management expects that these costs will be recovered
through net future revenues, it is reasonably possible that a write-down might
be required in the near term due to changes in the competitive market.

During 1998, the Company determined that the slow commercialization of certain
patents was an indication of an impairment in their carrying value. Although
the company continues to pursue these commercial applications, the Company
determined that an impairment writedown of $608,994 would be appropriate. The
Company is also continuing with the development of these patents in the area of
human therapeutics but due to the risks associated with the drug regulatory
approval process, these pursuits are considered research and development and
accordingly do not support on-going capitalization.


<PAGE>   20

POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States dollars]


Years ended January 31, 1998, 1997 and 1996




6. RELATED PARTY TRANSACTIONS

[a]  AMOUNTS DUE FROM AND TO RELATED PARTIES

Amounts due from and due to related parties consist of the following:

<TABLE>
<CAPTION>

                                                                          1998               1997
                                                                            $                  $
-----------------------------------------------------------------------------------------------------

<S>                                                                    <C>                <C>    
Amounts due from Novadex Corp. [i] [note 12]                           712,185            765,209
-----------------------------------------------------------------------------------------------------

Amounts due from shareholders [iii]                                    935,416                 --
-----------------------------------------------------------------------------------------------------

Amounts due to shareholders [iii]                                      590,526            605,475
-----------------------------------------------------------------------------------------------------

Amounts due to affiliated companies:
   Usher Insurance Company Ltd. [ii]                                   138,635            138,635
   Lincoln Underwriting Management Inc. [ii]                           286,785            286,785
-----------------------------------------------------------------------------------------------------
                                                                       425,420            425,420
-----------------------------------------------------------------------------------------------------
</TABLE>

Novadex Corp., Usher Insurance Company Ltd. and Lincoln Underwriting Management
Inc. are each controlled by an officer, director and major shareholder of the
Company [the "Major Shareholder"]. Amounts due from Novadex Corp. are
collateralized by a guarantee of the Major Shareholder.

     [i]  The amount due from Novadex Corp. has no fixed terms of repayment,
     except that amounts may not be called prior to February 1, 1999. This
     balance is non-interest bearing, except that an amount of $164,085 [1997 -
     $217,109] included in the balance bears interest at U.S. prime [8.5% at
     January 31, 1998; 8.25% at January 31, 1997].

     [ii]  The amounts due to Usher Insurance Company Ltd. and Lincoln
     Underwriting Management Inc. have no fixed terms of repayment, except that
     amounts may not be called prior to February 1, 1999, and are non-interest
     bearing.

     [iii]  Amounts due from (to) shareholders bear interest at U.S. prime plus
     1.5% [10% at January 31, 1998; 9.75% at January 31, 1997], except for an
     amount of $250,000 included in due from shareholders which is non-interest
     bearing. These amounts have no fixed terms of repayment except that the
     amounts may not be called prior to February 1, 1999.

Interest recorded with respect to amounts due to and due from related parties
are as follows:


<PAGE>   21
POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States dollars]


Years ended January 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>

                                                        1998              1997               1996
                                                          $                 $                  $
-----------------------------------------------------------------------------------------------------

<S>                                                   <C>               <C>                <C>   
Interest income                                       33,019            17,670             58,612
-----------------------------------------------------------------------------------------------------

Interest expense                                      46,768            65,520             66,487
-----------------------------------------------------------------------------------------------------
</TABLE>

[b]  ACQUISITION OF NOVADEX INTERNATIONAL INC.

During the year ended January 31, 1996, the Company acquired a 90% interest in
Novadex International Inc. from the Major Shareholder for an ascribed value of
$1,000,000 which was applied to the due from shareholder account. The principal
asset of Novadex International Inc. is a patent, developed by the Major
Shareholder, for the use of Cellulose Sulphate in a number of applications
including the development of a new contraceptive gel and use in the commercial
production of photographic film. The acquisition by the Company of its interest
in Novadex International Inc. has been accounted for by the purchase method, and
consolidated from the acquisition date of May 9, 1995.

The allocation of the purchase price of the assets and liabilities acquired was
as follows:
<TABLE>

                                                                                               $
-----------------------------------------------------------------------------------------------------

<S>                                                                                       <C>    
Cash                                                                                      250,000
Patents                                                                                   775,000
Minority interest                                                                         (25,000)
-----------------------------------------------------------------------------------------------------
                                                                                        1,000,000
-----------------------------------------------------------------------------------------------------
</TABLE>

During the year ended January 31, 1998, the Company issued 7,500 common shares
to acquire the remaining 10% interest in Novadex International Inc. from the
minority shareholder. These shares were valued at $10 per share representing the
quoted market value of the shares at the time of the transaction. An amount of
$53,391 representing the purchase price in excess of the book value of the
minority interest was allocated to the cost of patents.





<PAGE>   22
POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States dollars]


Years ended January 31, 1998, 1997 and 1996


7. BANK INDEBTEDNESS

Dextran Products Limited ["Dextran Products"] has an operating line of credit of
CDN $100,000 [US $69,400], none of which was utilized at January 31, 1998. This
line of credit bears interest at the Canadian bank's prime lending rate [6.5% at
January 31, 1998 ; 4.75% at January 31, 1997] plus 2%. Bank indebtedness is
collateralized by a general security agreement and limited personal guarantees
of certain shareholders.

8. LONG-TERM DEBT

Long-term debt consists of the following:
<TABLE>
<CAPTION>

                                                                          1998               1997
                                                                           $                  $
-----------------------------------------------------------------------------------------------------
<S>                                                                    <C>                <C>
Mortgage payable in monthly installments, bearing 
   interest at a rate of 8.5%, and maturing January, 2002, 
   collateralized by land and building with a carrying
   value as at January 31, 1998 of $850,484                            129,663            167,001
Note payable to bank, maturing January 1, 2000,
   bearing interest at a rate of 10.5%,  collateralized by
   assignments of land, building and equipment with a
   carrying value as at January 31, 1998 of $2,113,789                 362,532            377,062
Other                                                                   25,829             40,778
-----------------------------------------------------------------------------------------------------
                                                                       518,024            584,841
Less current portion                                                    55,392             60,185
-----------------------------------------------------------------------------------------------------
                                                                       462,632            524,656
-----------------------------------------------------------------------------------------------------
</TABLE>

The aggregate maturities of long-term debt for each of the years subsequent to
January 31, 1998 are as follows:
<TABLE>
<CAPTION>
                                                                                               $
-----------------------------------------------------------------------------------------------------
<S>                                                                                       <C>
1999                                                                                       55,392
2000                                                                                      383,694
2001                                                                                       42,541
2002                                                                                       36,397
-----------------------------------------------------------------------------------------------------
                                                                                          518,024
-----------------------------------------------------------------------------------------------------
</TABLE>

9. COMMITMENTS AND CONTINGENCIES



<PAGE>   23
POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States dollars]


Years ended January 31, 1998, 1997 and 1996




[a] DEFERRED GAIN

During the year ended January 31, 1997, the Company sold its shares in Novatek
International Inc., an unrelated company which Polydex had an investment in, for
a gain of $878,412. Prior to April 28, 1996, these shares were subject to
options held by unrelated parties. After April 28, 1996, these options expired
and the Company sold the shares in the open market realizing the gain.
Subsequently, the former option holders filed a lawsuit against the Company for
unspecified damages alleging that the Company denied them the opportunity to
exercise their option. The Company intends to vigorously defend the action,
however, because the proceedings are in the preliminary stages, the ultimate
outcome is not determinable. Accordingly, the Company has deferred the gain on
this transaction until the likelihood of the outcome of the lawsuit is
determinable. The reported gain has been reduced by legal fees of $104,195 in
1998 and $101,848 in 1997.

[b] OPERATING COMMITMENTS

The Company has obligations under non-cancellable operating leases of
approximately $16,000 annually to the year 2002. Rental expense for the year
totalled approximately $22,000 [1997 - $23,000; 1996 - $195,000].

10. CAPITAL STOCK

[a]  SHARE CAPITAL ISSUED AND OUTSTANDING

     [i] COMMON SHARES

     During the year ended January 31, 1998, the shareholders of the Company
     passed a resolution authorizing a one-for-ten reverse share split. All
     comparative amounts and per share amounts have been restated to reflect the
     impact of this reverse split on a retroactive basis. During the year, the
     Company issued 159,680 common shares for $1,000,000 in cash in a private
     placement. The Company also issued 2,404 common shares pursuant to the
     exercise of stock options. These options had an exercise price of $7.50 per
     share. The Company did not receive a cash payment in connection with the
     exercise of these options. Instead, the shares were issued in exchange for
     past services rendered, valued at $18,030. The Company also issued 7,500
     common shares in exchange for the 10% minority interest in the subsidiary,
     Novadex International Inc., as described in note 6. In addition, the
     Company issued 2,095 common shares for no consideration to adjust for
     fractional shares created by the reverse share split.




<PAGE>   24
POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States dollars]


 Years ended January 31, 1998, 1997 and 1996

     During the year ended January 31, 1997, the Major Shareholder exercised
     options for 20,000 common shares valued at $150,000. These shares were
     issued in exchange for partial settlement of the Major Shareholder's loan
     account with the Company.

     During the year ended January 31, 1996, the Company issued 1,000 common
     shares valued at $10,000 under a private placement as payment for services
     rendered to the Company.

     [ii] A PREFERRED SHARES

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

     [iii] B PREFERRED SHARES

     During the year ended January 31, 1996, the Company issued 600,000 B
     preferred shares under a private placement to the Major Shareholder of the
     Company for $10,020 as partial settlement of the Major Shareholder's loan
     account with the Company.

     The B preferred shares carry no dividends, are non-convertible and entitle
     the holder to one vote per share.

 [b]  SHARE OPTION PLAN

     [i] OPTIONS OUTSTANDING

     The Company maintains an incentive stock option plan to grant options to
     purchase common stock to management personnel and contractors. Options
     granted have terms ranging from one to four years and vest immediately. At
     January 31, 1998, the Company has 266,673 options outstanding at exercise
     prices ranging from $5.00 to $12.50, and a weighted average price of $9.13.
     The options which are all exercisable and expire on dates between June 30,
     1998 and December 31, 2000, entitle the holder of an option to acquire one
     common share of the Company.


<PAGE>   25
POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States dollars]


Years ended January 31, 1998, 1997 and 1996



     Details of the outstanding options, which are all currently exercisable,
are as follows:
<TABLE>
<CAPTION>

                                                                            WEIGHTED AVERAGE
                                           SHARE OPTIONS                 OPTION PRICE PER SHARE
                                  ------------------------------       ---------------------------
                                  1998         1997         1996       1998       1997       1996
                                                                         $          $          $
--------------------------------------------------------------------------------------------------
     <S>                      <C>           <C>          <C>           <C>        <C>        <C>
     OPTIONS OUTSTANDING,
       BEGINNING OF YEAR       317,077      295,577      158,577       9.10       9.30       8.40
     Granted                   139,077       56,500      176,500       8.03       8.00       9.80
     Exercised                  (2,404)     (20,000)          --       7.50       7.50         --
     Cancelled or expired     (187,077)     (15,000)     (39,500)      8.08       8.70       7.80
-----------------------------------------------------------------------------------------------------
     OPTIONS OUTSTANDING,
       END OF YEAR             266,673      317,077      295,577       9.13       9.10       9.30
-----------------------------------------------------------------------------------------------------

     WEIGHTED AVERAGE FAIR
       VALUE OF OPTIONS GRANTED
       DURING THE YEAR           $2.29        $4.95        $2.35
-----------------------------------------------------------------------------------------------------
</TABLE>

     The following table summarizes information relating to the options
     outstanding at January 31, 1998:
<TABLE>
<CAPTION>

                                                           OPTIONS OUTSTANDING
-----------------------------------------------------------------------------------------------------
                                                NUMBER           WEIGHTED AVERAGE       WEIGHTED
          RANGE OF                          OUTSTANDING AT           REMAINING           AVERAGE
          EXERCISE                            JANUARY 31,        CONTRACTUAL LIFE       EXERCISE
           PRICES                                1998                (MONTHS)               PRICE
                                                   $                     $                     $
-----------------------------------------------------------------------------------------------------

     <S>                                       <C>                       <C>               <C>  
     $5.00                                         500                     5                $5.00
     $7.50                                      92,672                     5                $7.50
     $10.00                                    172,500                    28               $10.00
     $12.50                                      1,000                     5               $12.50
-----------------------------------------------------------------------------------------------------
                                               266,672                                      $9.13
-----------------------------------------------------------------------------------------------------
</TABLE>

     [ii] PRO FORMA EARNINGS

     Adopting SFAS 123 would require the Company to estimate the fair value of
     any options granted and to reflect these amounts as compensation expense in
     determining net income for each year. In order to estimate the fair value
     of its options, the Company may use option pricing models which were
     developed for use in estimating the fair value of traded options which have
     no vesting restrictions and are fully transferable. Because the Company's
     

<PAGE>   26
POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States dollars]


Years ended January 31, 1998, 1997 and 1996





     employee stock options have characteristics significantly different from
     those options and because changes in subjective input assumptions can
     materially affect the fair value estimate, in management's opinion, the
     existing models do not necessarily provide a reliable single measure of the
     fair value of its employee stock options.

     However, as required by SFAS 123, pro forma information regarding net
     income and earnings per share has been determined as if the Company had
     accounted for its employee stock options under the fair value method. The
     fair value for these options was estimated at the date of grant using a
     Black-Scholes option pricing model with the following weighted-average
     assumptions for 1998: risk-free interest rates of 5.36% [1997 - 5.48%; 1996
     - 5.33%]; dividend yields of nil [1997 and 1996 - nil]; volatility factors
     of the expected market price of the Company's common stock of 0.944 [1997 -
     1.001; 1996 - 0.926], and an expected life of the options ranging from one
     to three years [1997 - one to four years; 1996 - one to five years]. For
     purposes of pro forma disclosures, the estimated fair value of the options
     is expensed immediately.

     The Company's pro forma net income (loss) following SFAS 123 are as
follows:
<TABLE>
<CAPTION>

                                                        1998              1997               1996
                                                          $                 $                  $
-----------------------------------------------------------------------------------------------------

<S>                                                  <C>             <C>              <C>        
     Pro forma net income (loss)                     297,184         (285,424)        (1,559,459)
     Pro forma earnings per share
       Basic                                            0.10            (0.10)             (0.56)
       Fully diluted                                    0.10            (0.10)             (0.56)
=====================================================================================================
</TABLE>

11. VETERINARY LABORATORIES INC. ["VET LABS"]

[a] PURCHASE OBLIGATION TO CONTINENTAL GRAIN COMPANY

In 1992, the Company, through its 90% owned subsidiary, Chemdex Inc.
["Chemdex"], acquired 100% of the issued outstanding share capital of Vet Labs
from Continental Grain Company ["CGC"] for a total purchase price of $3,894,980,
which was satisfied by issuing 194,749 common shares of the Company.
The acquisition was accounted for as a purchase.

The Major Shareholder had guaranteed that, by November 30, 1996, CGC would
realize a value of $3,894,980 on the eventual sale of these shares or CGC had an
option to put its remaining shares to the Company or the Major Shareholder at
such a price to bring CGC's total consideration to $3,894,980. By November 1996,
CGC had realized approximately $800,000 on the sale of 44,850 common shares but
had not been able to sell all of their shares. On November 22, 1996, the terms
of the original purchase agreement were amended.




<PAGE>   27
POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States dollars]


Years ended January 31, 1998, 1997 and 1996




In exchange for the Company reattributing net operating loss carryforwards of
$5.0 million [carrying value of nil] which existed in Vet Labs at the time of
acquisition by the Company and the Company assuming the purchase obligation of
the Major Shareholder, CGC has reduced the maximum repurchase obligation of the
Company relating to CGC's remaining 149,899 common shares from approximately
$3.1 million at November 22, 1996 to $2.0 million. In addition, the deadline for
CGC to exercise its option for the sale of shares to the Company has been
extended from November 30, 1996 to May 30, 1999.

In order to ensure that there is an orderly disposition of shares, CGC has
agreed to not sell more than an average of 5,000 shares per month in any
six-month period. If CGC has not been able to sell an average of 5,000 shares
per month at an average price of $13.34 per share, the Company will issue to CGC
additional shares such that the proceeds realized by CGC in the six-month period
plus the market value of the additional shares issued will leave CGC in the same
position as if it had sold shares at an average price of $13.34 per share. If
CGC's sale of shares at the end of each six-month period is at an average price
greater than $13.34 per share, then CGC will return to the Company sufficient
additional shares to reduce the average price to $13.34 per share. Throughout
fiscal 1998, the shares have traded at values in a range of $5.50 to $13.00 and
as at January 31, 1998, the closing market price was $ 6.88. To date, CGC has
not requested any additional shares under this agreement. Any shares issued will
be considered to be a component of the original transaction value and would be
recorded at nominal consideration. The assets of Vet Labs have been pledged as
collateral for this guarantee.

The Company is currently reviewing alternatives to address the potential
requirement on March 15, 1999 to repurchase up to $2.0 million of the common
shares held by CGC. Although management expects that a portion of this
obligation could be funded from existing cash and cash generated from operations
during the next year, it is reasonably possible that the Company will be
required to obtain additional financing, such as increased operating or term
borrowing facilities or issue of additional share capital or alternatively will
be required to re-negotiate the terms of the obligation. CGC has expressed a
willingness to review the terms of the agreement. There is no assurance that the
Company would be able to obtain such additional financing or on terms favourable
to the Company.

[b] SPARHAWK LABORATORIES INC. ["SPARHAWK"]

In 1992, Vet Labs and Sparhawk entered into a joint venture [collectively
referred to as the "Joint Venture"] for the purpose of manufacturing and selling
veterinary pharmaceutical products. Sparhawk is an affiliated company owned
primarily by the management of the Joint Venture. The Company controls the Joint
Venture through its control of the board of directors. The Company has funded
the Joint Venture's losses since 1992, and accordingly has recorded 100% of
these losses in the consolidated financial statements. As at January 31, 1998,
future profits of approximately $1,900,000 will accrue to the Company until
Sparhawk's share of losses since 1992 

<PAGE>   28
POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States dollars]


Years ended January 31, 1998, 1997 and 1996



have been recovered. Subsequent income will be allocated 50% to Vet Labs and 50%
to Sparhawk.

12. LICENSE AGREEMENTS AND RESEARCH AND DEVELOPMENT

[a]  IRON DEXTRAN PROCESS

Effective February 1, 1995, the Company entered into an agreement with Novadex
Corp., an affiliated company, whereby Novadex Corp. granted the Company the
exclusive worldwide licence to use a certain process developed by Novadex Corp.
for producing Iron Dextran. The term of this licence agreement is 10 years. The
Company pays a licence fee based on production volumes. The total royalty
expense incurred during the year was $71,088 [1997 - $88,835, 1996 - $80,491].

[b]  CYSTIC FIBROSIS

Effective April 1, 1994, the Company had entered into a Research Agreement [the
"Agreement"] with Novadex Pharmaceuticals Limited ["Novadex Pharmaceuticals"], a
company owned by the Major Shareholder, and the University of British Columbia
["UBC"]. Under the terms of the Agreement, the Company agreed to provide
equipment and funding in connection with research into Cystic Fibrosis. This
agreement was amended on April 1, 1996 and expanded to include a number of
Canadian hospitals.

In conjunction with the Agreement, UBC granted the Company, through a
sub-licensing agreement with Novadex Pharmaceuticals, an exclusive worldwide
licence to manufacture, distribute and sell products derived or developed from
the research performed. The Company will pay a quarterly royalty to both UBC and
Novadex Pharmaceuticals, based on net sales.

Costs incurred during the year in relation to the Agreement total $71,338 [1997
- $55,483; 1996 - $175,100].

13. WRITE-DOWN OF LONG-TERM INVESTMENT

During the year ended January 31, 1996, the Company wrote off the $400,000
investment in Personal Blood Storage of South Florida, Inc. as a result of its
continuing financial difficulties. This investment had been recorded at cost in
the consolidated financial statements.





<PAGE>   29
POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States dollars]


Years ended January 31, 1998, 1997 and 1996



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 before income taxes and minority interest are as
follows:
<TABLE>
<CAPTION>

                                                              1998            1997           1996
                                                                $               $              $
-----------------------------------------------------------------------------------------------------

<S>                                                         <C>               <C>            <C>      
     Bahamas                                                (1,654,659)       (574,139)      (988,617)
     Canada                                                  1,247,816       1,114,456        279,122
     United States                                             (42,219)       (405,590)      (451,354)
-----------------------------------------------------------------------------------------------------
                                                              (449,062)        134,727     (1,160,849)
-----------------------------------------------------------------------------------------------------

     The income tax provision consists of the following:
<CAPTION>

                                                                1998            1997           1996
                                                                  $               $              $
-----------------------------------------------------------------------------------------------------
<S>                                                         <C>               <C>            <C>
     Provision for income taxes based on Bahamian income            --              --             --

     Provision for income taxes based on Canadian statutory
       income tax rates                                        556,526         497,047        124,488
     Benefit of previously unrecorded Canadian tax items    (1,492,568)       (484,566)      (117,738)
-----------------------------------------------------------------------------------------------------
                                                              (936,042)         12,481          6,750

     Provision for income taxes based on United States
       income tax rates                                    (16,888)       (162,236)      (180,542)
     United States losses not recognized                    16,888         162,236        180,542
-----------------------------------------------------------------------------------------------------
                                                                 --               --              --
     INCOME TAX PROVISION (RECOVERY)                      (936,042)         12,481          6,750
=====================================================================================================
</TABLE>






<PAGE>   30
POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States dollars]


Years ended January 31, 1998, 1997 and 1996




Significant components of the income tax provision attributable to continuing
     operations are as follows:
<TABLE>
<CAPTION>

                                                              1998            1997           1996
                                                                $               $              $
-----------------------------------------------------------------------------------------------------

<S>                                                       <C>               <C>             <C>                     
     Canadian federal deferred tax recovery               (950,000)             --             --
     Canadian federal deferred tax expense                  13,958          12,481             --
     Canadian federal current tax expense                       --              --          6,750
-----------------------------------------------------------------------------------------------------
                                                          (936,042)         12,481          6,750
-----------------------------------------------------------------------------------------------------
</TABLE>

[b]  Deferred income tax assets have been provided on temporary differences
     which consist of the following:
<TABLE>
<CAPTION>

                                                              1998            1997           1996
                                                                $               $              $
-----------------------------------------------------------------------------------------------------

     DEFERRED TAX ASSETS
     Canadian
<S>                                                        <C>             <C>            <C>    
       Non-capital losses                                  123,000         467,000        557,000
       Unclaimed research and development 
         expenses                                          923,000         954,000        955,000
       Investment tax credits                              194,000         223,000        227,000
       Amortization of property, plant and 
         equipment which has not yet been claimed 
         for income tax purposes                            48,000         238,000        269,000
       Other items                                         143,000         160,000        150,000
     United States
       Net operating losses                                715,000         699,000      2,100,000
-----------------------------------------------------------------------------------------------------
                                                         2,146,000       2,741,000      4,258,000
     Valuation allowance                                (1,196,000)     (2,741,000)    (4,258,000)
-----------------------------------------------------------------------------------------------------
     NET DEFERRED TAX ASSET                                950,000              --             --
-----------------------------------------------------------------------------------------------------
</TABLE>

     During 1998, as a result of the sustained profitability of the Company's
     Canadian operations and the resulting ability to utilize the Company's
     Canadian tax losses and deductions and after considering the expectations
     for continued profitability of the Canadian operations into the future, the
     Company determined in 1998 that the valuation allowance should be reduced
     by $950,000.

     Deferred income tax liabilities of $26,439 at January 31, 1998 [January 31,
     1997 - $12,481] have been provided on temporary differences arising from
     differences between the carrying amount for financial reporting purposes
     and the amounts used for income tax purposes for investment tax credits.





<PAGE>   31
POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States dollars]


Years ended January 31, 1998, 1997 and 1996




[c]  The Canadian subsidiaries of the Company have non-capital loss
     carryforwards for Canadian tax purposes which expire in the following
     fiscal years:
<TABLE>
<CAPTION>

                                                                       FEDERAL            ONTARIO
                                                                           $                  $
-----------------------------------------------------------------------------------------------------

     <S>                                                               <C>                <C>                    
     1999                                                               40,000                 --
     2000                                                                   --                 --
     2001                                                                   --            353,000
     2002                                                                   --                 --
     2003                                                              121,000            121,000
     2004                                                                   --             20,000
-----------------------------------------------------------------------------------------------------
                                                                       161,000            494,000
-----------------------------------------------------------------------------------------------------
</TABLE>

     In addition, the Canadian subsidiaries have deductions available to reduce
     future years' income for tax purposes on account of net temporary
     differences resulting from expense items reported for tax purposes in
     different periods than for financial statement purposes totalling $2.6
     million and $1.5 million for federal and provincial purposes respectively.
     Certain Canadian subsidiaries also have net capital losses available for
     carryforward of $435,000 available to offset taxable capital gains. These
     potential deductions and net capital losses have an indefinite carryforward
     period.

     Certain Canadian subsidiaries have also earned investment tax credits of
     $194,000 which are available to offset federal income taxes payable in the
     future expiring from 1999 through 2007.

     The benefits associated with these losses, deductions and investment tax
     credits have been recorded in the consolidated financial statements to the
     extent described in note 14 [b].

[d]  The U.S. subsidiaries of the Company have net operating loss carryforwards
     for tax purposes of approximately $1.8 million which expire from 2005 to
     2013.

     The benefits associated with these losses have been recorded in the
     consolidated financial statements to the extent described in note 14 [b].





<PAGE>   32
POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States dollars]


Years ended January 31, 1998, 1997 and 1996




15. CONSOLIDATED STATEMENTS OF CASH FLOWS

The net change in non-cash working capital balances consists of the following:
<TABLE>
<CAPTION>

                                                        1998              1997               1996
                                                          $                 $                  $
-----------------------------------------------------------------------------------------------------
<S>                                                  <C>              <C>                <C>      
DECREASE (INCREASE) IN CURRENT ASSETS
Trade accounts receivable                            142,389          (371,576)          (119,149)
Inventories                                         (444,290)          140,539            324,636
Prepaid expenses and other assets                    (94,889)            1,499             (1,117)
-----------------------------------------------------------------------------------------------------
                                                    (396,790)         (229,538)           204,370
INCREASE (DECREASE) IN CURRENT LIABILITIES
Accounts payable                                     (25,489)         (280,479)             8,789

Accrued liabilities                                  (74,665)          (53,131)            (1,188)
-----------------------------------------------------------------------------------------------------
                                                    (496,944)         (563,148)           211,971
-----------------------------------------------------------------------------------------------------
</TABLE>

Cash paid during the year for interest was $82,536 [1997 - $85,943; 1996 -
$68,313]. Cash paid during the year for income taxes was nil [1997 - nil; 1996 -
$6,750].

Excluded from the consolidated statements of cash flows for the year ended
January 31, 1998 is the issuance of 2,404 common shares of the Company in
exchange for services rendered to the Company[note 10] and the acquisition of
the remaining 10% interest in Novadex International Inc. [notes 6 and 10] from
the minority shareholder in exchange 7,500 common shares.

Excluded from the consolidated statements of cash flows for the year ended
January 31, 1997 is the issuance of 20,000 common shares of the Company in
exchange for a reduction in the Major Shareholder's loan account.

Excluded from the consolidated statements of cash flows for the year ended
January 31, 1996 is the issuance of 1,000 common shares of the Company in
exchange for services rendered to the Company, the issuance of 600,000 B
preferred shares in exchange for a reduction in the Major Shareholder's loan
account and the acquisition of a 90% interest in Novadex International Inc.
[note 6] from the Major Shareholder in exchange for a shareholder loan.

The above transactions are considered non-cash financing and investing
activities.






<PAGE>   33
POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States dollars]


Years ended January 31, 1998, 1997 and 1996




16. SEGMENTED INFORMATION

All of the operations of the Company are carried on through Dextran Products in
Canada and through Vet Labs in the United States. These subsidiaries operate
principally in one industry: the manufacture of veterinary pharmaceutical
products and specialty chemicals. Dextran Products manufactures and sells bulk
quantities of Dextran and several of its derivatives to large pharmaceutical
companies. Vet Labs develops, manufactures and sells veterinary pharmaceutical
products through distributors and private labelers.

[a]  Segmented information by geographic area is as follows:
<TABLE>
<CAPTION>

                                                        1998              1997               1996
                                                          $                 $                  $
-----------------------------------------------------------------------------------------------------
<S>                                                <C>               <C>                <C>      
Sales
   Canada                                          3,910,584         4,201,555          3,249,032
   United States                                   5,931,781         5,142,534          5,210,531
-----------------------------------------------------------------------------------------------------
SALES                                              9,842,365         9,344,089          8,459,563
-----------------------------------------------------------------------------------------------------

Operating income (loss)
   Canada                                          1,271,403         1,122,615            264,027
   United States                                     (19,244)         (365,467)          (452,538)
   General corporate expenses                     (1,605,564)         (527,587)          (509,238)
   Corporate research and development                (24,771)               --             (5,550)
   Interest expense                                 (129,199)         (151,463)          (131,259)
-----------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS                       (507,375)           78,098           (834,558)
-----------------------------------------------------------------------------------------------------

Identifiable assets at year end
   Canada                                          4,127,184         3,354,384          2,046,793
   United States                                   3,734,958         3,619,717          3,736,838
   Corporate assets                                1,878,805         1,653,416          2,281,359
-----------------------------------------------------------------------------------------------------
TOTAL ASSETS                                       9,740,947         8,627,517          8,064,990
-----------------------------------------------------------------------------------------------------
</TABLE>

Identifiable assets are those assets of the Company that are identified with the
operations in each geographic area. Corporate assets are principally patents,
investment in affiliated company, amounts due from affiliated companies and
amounts due from shareholders.






<PAGE>   34
POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States Dollars]

Years ended January 31, 1998, 1997 and 1996

[b] Consolidated sales by destination are as follows:
<TABLE>
<CAPTION>

                                                        1998              1997               1996
                                                          $                 $                  $
-----------------------------------------------------------------------------------------------------

<S>                                                <C>               <C>                <C>      
United States                                      6,477,247         5,852,313          5,770,268
Canada                                               699,539           792,051            723,452
Europe                                             1,574,569         1,470,159          1,190,660
Pacific Rim                                          912,530           983,029            725,783
Other                                                178,480           246,537             49,400
-----------------------------------------------------------------------------------------------------
                                                   9,842,365         9,344,089          8,459,563
-----------------------------------------------------------------------------------------------------
</TABLE>

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 amounts of cash, trade accounts receivable, accounts payable, and
accrued liabilities approximate fair value at January 31, 1998 because of the
short maturity of these financial instruments.

The estimated carrying value of due from Novadex, due from and to shareholders,
due to affiliates, long term debt, and non-current liabilities is not materially
different from the carrying value for financial statement purposes at January
31, 1998 and 1997. It is not practical to estimate the fair value of the amounts
due from Novadex, due from and to shareholders and due to affiliates, as there
are no fixed terms of repayment. The long-term debt bears interest at rates
approximating current market rates.

18. CONCENTRATION OF ACCOUNTS RECEIVABLE

At January 31, 1998, there was one customer of the Company which comprised 14%
of the consolidated trade accounts receivable balance. The receivable from this
customer was fully covered by export credit insurance provided by the Canadian
government. There were no individual customer receivable balances in excess of
10% of the consolidated trade accounts receivable balance at January 31, 1997.






<PAGE>   35
POLYDEX PHARMACEUTICALS LIMITED

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      [Expressed in United States dollars]


Years ended January 31, 1998, 1997 and 1996



19. NEW ACCOUNTING STANDARDS

In June 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income". This Statement established standards for
reporting and displaying comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. Such items may include foreign currency translation adjustments,
unrealized gains/losses from investing and hedging activities, and other
transactions. This Statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. This Statement is effective for financial statements
for fiscal years beginning after December 15, 1997 and therefore the Company
will adopt the new requirements retroactively in 1999.

In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures About Segments of an Enterprise and Related Information", which
establishes standards for the way public companies report information about
operating segments in annual financial statements and requires that those
companies report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This Statement is effective for financial statements for fiscal years
beginning after December 15, 1997 and therefore the Company will adopt the new
requirements retroactively in 1999.

20. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS

The comparative consolidated financial statements have been reclassified from
statements previously presented to conform to the presentation of the 1998
consolidated financial statements. In addition, shareholders' equity has been
restated to reclassify the common shares subject to the put option described in
note 11.