**SECURITIES
                AND EXCHANGE COMMISSION**Washington,
                D.C. 20549
              
              **FORM
                10-K**




x ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF


1934
      FOR
      THE FISCAL YEAR ENDED JANUARY 31, 2006




**OR**
  oTRANSITION
        REPORT PURSUANT TO
        SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  Commission
          File Number: 1-8366
 **POLYDEX
          PHARMACEUTICALS LIMITED**
 (Exact
          name of Registrant as specified in its charter)




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




**421
        Comstock Road**
 **Toronto,
        Ontario, Canada**
 (Address
        of principal executive offices)
  **M1L
        2H5.**
 (zip
        code)




Registrant’s
                telephone number, including area code**(416)
                755-2231**Securities
                registered pursuant to Section 12(b) of the Act: NoneSecurities
                registered pursuant to Section 12(g) of the Act:
              **Common
                Stock, $0.0167 par value**
              (Title
                of Class)Indicate
                by check mark whether the Registrant is a well-known seasoned issuer,
                as
                defined in Rule 405 of the Securities Act. Yes o
                NoxIndicate
                by check mark if the Registrant is not required to file reports pursuant
                to Section 13 or Section 15(d) of the Act. Yes o
                NoxIndicate
                by check mark whether the Registrant: (1) has filed all reports required
                to be filed by Section 13 or 15(d) of the Securities Exchange Act
                of 1934
                during the preceding 12 months (or for such shorter period that the
                Registrant was required to file such reports), and (2) has been subject
                to
                such filing requirements for the past 90 days. YesxNo oIndicate
                by check mark if disclosure of delinquent filers pursuant to Item
                405 of
                Regulation S-K is not contained herein, and will not be contained,
                to the
                best of Registrant’s knowledge, in definitive proxy or information
                statements incorporated by reference in Part III of this Form 10-K
                or any
                amendment to this Form 10-K.  Yes o No xIndicate
                by check mark whether the Registrant is a large accelerated filer,
                an
                accelerated filer or a non-accelerated filer. See definition of
                accelerated filer and large accelerated filer in Rule 12b-2 of the
                Act.
              Large
                Accelerated Filer  o   
                Accelerated Filer  o    Non-Accelerated
                Filer  xIndicate
                by check mark whether the Registrant is a shell company (as defined
                in
                Rule 12b-2 of the Exchange Act). Yes o NoxThe
                aggregate market value of the Registrant’s voting common shares held by
                non-affiliates of the Registrant, based upon the $5.00 per share
                closing
                price of the Registrant’s common shares on July 29, 2005 (the last
                business day of the registrant’s most recently completed second fiscal
                quarter), was approximately $11,821,620 . For purposes of this
                calculation, the Registrant’s directors, executive officers and holders of
                more than 10% of the Registrant’s common shares have been assumed to be
                affiliates.The
                number of common shares of the Registrant outstanding as of April
                28,
                2006, was 3,058,896.Portions
                of the Registrant’s Notice of Annual Meeting and Proxy Statement for the
                Registrant’s 2006 Annual Meeting of Members, scheduled to be held on July
                7, 2006, are incorporated by reference into Part III of this
                Report.










**Cautionary
      Note Regarding Forward-Looking Statements**




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





2





**PART
      I**




ITEM
      1.   BUSINESS




**Introduction**




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




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




The
      Company
      conducts its business operations through its subsidiaries. The manufacture
      and
      sale of Dextran and derivative products is conducted through Dextran Products
      Limited, incorporated in Canada in 1966 (“Dextran Products”).




**Products
      and Sales**




** ***Iron
      Dextran***




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




***Dextran
      Sulphate***




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




**Patents,
      Trademarks and Licenses**




***Cellulose
      Sulphate***




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




3





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




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




***Cystic
      Fibrosis***




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




***Iron
      Dextran***




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




***Dextran
      Sulphate***




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




***Elastin and Collagen***




Certain
      processes with respect to these materials were patented by the Company under
      U.S. patent numbers 4,659,740 and 4,784,986 on April 21, 1987 and November
      15,
      1988, respectively. These patents cover a process whereby the materials are
      modified in such a way as to penetrate the skin and act as a hydrating
      agent.





4





**Suppliers**




**** ***Dextran
      Products***




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




The
      Company
      is dependent upon a single source for a certain raw material used in the
      production of Dextran Sulphate. Such supply was adequate in fiscal year 2006
      and
      no shortages are anticipated in the near term. However, any curtailment in
      availability of such raw material could be accompanied by production or other
      delays as well as increased raw material costs, with consequent adverse effect
      on the Company’s results of operations. The Company has no long-term contracts
      with any of its suppliers.




**Backlog
      and Seasonality**




The
      Company’s
      backlog as at January 31, 2006 was approximately $200,000, whereas backlog
      as at
      January 31, 2005 was approximately $350,000. All of these orders are expected
      to
      be filled within the current fiscal year. The Company’s bulk pharmaceutical
      intermediate business may be characterized as seasonal in that many end-users
      of
      the finished product veterinary pharmaceuticals manufactured from these
      intermediates require fewer vitamins and other supplements during the summer
      months when livestock are put out to pasture. However, the Company does not
      believe that such seasonality is material to its financial results as a
      whole.




**Competition**




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




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




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




**Environmental
      Compliance**




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




**Employees**




As
      of March
      31, 2006, the Company employed 26 employees, of whom 15 were engaged in
      production, 7 in quality control, 1 in research and development, 2 in
      administration and 1 in marketing and sales activities. None of the Company’s
      employees are covered by collective bargaining agreements. Management considers
      its relations with employees to be good.





5





**Research
      and Development**




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




***Cellulose
      Sulphate (Ushercell)***




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




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




During
      fiscal
      year 2006 several clinical trials were conducted, ongoing and commenced.




In
      particular:




•
            A
                tolerance study of 36 HIV-infected men was conducted in collaboration
                with
                the Institute of Tropical Medicine in Belgium. 24 of the participants
                were
                assigned Ushercell and 12 assigned a placebo. 31.8% of the Ushercell
                users
                reported a tingling sensation and the final analysis determined that
                Ushercell was safe and well tolerated by HIV infected men and reported
                symptoms of irritation were considered mild. A further study was
                conducted
                in collaboration with the University of California with 119 sexually
                active women in Zimbabwe to assess the safety and acceptability of
                Ushercell when used with a diaphragm. That trial is now complete
                and the
                final report is expected in late 2006.A
                large-scale Phase II human clinical trial of the contraceptive efficacy
                of
                Ushercell was conducted in the United States in collaboration with
                Family
                Health International and the California Family Health Council, with
                additional supportive funding provided by the Bill and Melinda Gates
                Foundation. The trial results were announced in January 2006, indicating
                that Ushercell was 96% effective in preventing unwanted pregnancies
                when
                used as directed. Over three-quarters of the women and their partners
                involved in this study indicated that they would buy Ushercell to
                prevent
                pregnancy.•
            A
                study to determine the effectiveness of Cellulose Sulphate gel as
                a
                treatment for Bacterial Vaginosis, a common disorder among
                reproductive-age women, has commenced at the University of Campinas,
                in
                San Paola, Brazil, projecting enrollment of 60 women. The trial is
                ongoing
                and a report on findings is expected in late
                2006.





6





•
            Two
                Phase III clinical trials to assess the effect of Ushercell on vaginal
                HIV
                acquisition have commenced in five clinical trial sites located in
                India
                and Africa. These studies will enroll more than 4,500 sexually active
                women with a high risk of HIV infection. These trials are being conducted
                by CONRAD, in collaboration with Family Health International with
                financial support from USAID and the Bill and Melinda Gates Foundation.
                The Phase III trials had staggered commencement dates in October
                2004 and
                May 2005. These trials are expected to take three years to complete.
                It is
                anticipated that final analysis of these trials could take a further
                year
                to complete, and reports of findings are expected in
                2009.




Should
      continued positive results be generated from this work, the Company has been
      advised that the funding from CONRAD will continue through Phase III trials.
      The
      Company maintains an exclusive worldwide license for this product.




***Cystic
      Fibrosis***




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




As
      noted
      above, in 1999, the Company’s cystic fibrosis product was licensed to BCY
      LifeSciences. In November, 2003 BCY LifeSciences announced its completion of
      the
      analysis of a Phase II clinical trial of the product designed to assess the
      efficacy and safety of the product on pulmonary function in adult cystic
      fibrosis patients. The results indicated that the product (known as DCF 987)
      was
      well tolerated and may have shown positive trends in the improvement of
      FEV 1 (forced
      expiratory volume in one second), a measure of lung function, and the reduction
      of Pseudomonas aeruginosa bacterial load in patient sputum. BCY LifeSciences
      was
      also granted a patent entitled “Use of Dextran and Other Polysaccharides to
      Improve Mucus Clearance” by the European Patent Office. The Company will receive
      royalty payments based upon sales and other revenues upon approval of any
      developed product pursuant to its license agreement with BCY LifeSciences.
      In
      February of 2005, BCY LifeSciences entered into a development agreement with
      Align Pharmaceuticals to fund ongoing studies on the compound.




**Segmented
      Information**




The
      information regarding the geographic distribution of revenue, operating results
      and assets is set forth in Note 16 to the Company’s Consolidated Financial
      Statements for the fiscal year ended January 31, 2006 under Item 8 *Financial
      Statements and Supplementary Data* .





7





ITEM
      2.   PROPERTIES




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




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




Management
      has decided that expansion of the Company’s facility in Toronto is now due.
      Increased interest in certain of the Company’s products has warranted the
      purchase of new drying equipment which is due to be installed in fiscal year
      2007. Engineers are preparing drawings and permits have been requested. This
      equipment will allow for potential increased production of powdered product.




During
      approximately one month of the 2005 fiscal year, Vet Labs owned a 55,000 square
      foot finished product veterinary pharmaceutical manufacturing facility located
      on eight acres of land in Lenexa, Kansas. On March 4, 2004, the Company sold
      its
      finished product veterinary pharmaceutical business to Sparhawk. The sale
      included substantially all of the assets of Vet Labs, including this
      manufacturing facility, and its ownership interest in the Joint
      Venture.




ITEM
      3.   LEGAL
      PROCEEDINGS




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




The
      litigation involving the Joint Venture, *Sparhawk
      Laboratories, Inc. v. Veterinary Laboratories, Inc., et al* ,
      Case
      No. 02CV07426, County of Johnson, State of Kansas, was settled on March 4,
      2004,
      and a Motion of Approval of Settlement and Stipulation of Dismissal with
      Prejudice was filed with the Court on that date.




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




No
      matters
      were submitted to a vote of security holders, through the solicitation of
      proxies or otherwise, during the Company’s fourth fiscal quarter ended January
      31, 2006.





8





**PART
      II**




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




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




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




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




**Fiscal
                Year 2005**
              **fiscal
                quarter ended:**
            
            **High**
            
            **Low**April
                30, 2004
            
            $
            8.50
            
            
            6.91July
                31, 2004
            
            
            7.56
            
            
            5.78October
                31, 2004
            
            
            7.65
            
            
            4.92January
                31, 2005
            
            
            8.00
            
            
            5.75




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




As
      of April
      28, 2006 there were approximately 360 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 Company that restrict the export or import of capital,
      including foreign exchange controls, or that affect the remittance of dividends
      or other payments to nonresident holders of the Company’s common shares.
      Furthermore, United States holders of the Company’s common shares are not
      subject to taxes under Bahamian law.




The
      Company
      did not sell any unregistered common shares during its 2006 fiscal year and
      does
      not currently have a plan to repurchase any of its common shares.





9





ITEM
      6.   SELECTED
      FINANCIAL DATA




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





**Fiscal
                year ended January 31,****2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**Sales
                from continuing operations
            
            
            5,265,209
            
            
            6,372,359
            
            
            14,092,189
            
            
            12,786,343
            
            
            12,167,530Net
                income (loss) from continuing operations
            
            
            (1,489,053
            )
            
            1,139,911
            
            
            (5,999
            )
            
            (673,741
            )
            
            (206,880
            )Net
                income (loss) per common share
            
            
            (0.49
            )
            
            0.38
            
            
            —
            
            
            (0.22
            )
            
            (0.07
            )Total
                assets
            
            
            9,910,445
            
            
            10,811,873
            
            
            10,510,513
            
            
            9,712,574
            
            
            10,080,880Long-term
                borrowings
            
            
            691,178
            
            
            833,631
            
            
            1,013,701
            
            
            1,188,603
            
            
            1,724,159





10




ITEM
        7. MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS


*The
      Company’s fiscal year ends on January 31* *st* *of
      each year. In this report, fiscal year 2006 refers to the Company’s fiscal year
      ended January 31, 2006. The following discussion should be read in conjunction
      with the financial statements and notes thereto included elsewhere in this
      report. The Company’s financial statements are prepared in accordance with
      United States generally accepted accounting principles. All amounts are in
      United States dollars, unless otherwise denoted. This discussion contains
      forward-looking statements within the meaning of Section 21E of the Securities
      Exchange Act of 1934, as amended. For a discussion of risks, uncertainties
      and
      other factors that could cause actual results to differ materially from those
      expressed in, or implied by the forward-looking statements, see the discussion
      of Risk Factors below and “Cautionary Note Regarding Forward-Looking Statements”
above.*




**Overview**




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




***Dextran
      Products Business***




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




In
      fiscal
      year 2007 management intends to continue its focus on the core businesses of
      Dextran Products that have historically been the backbone of the Company.
      Opportunities to increase distribution chains for existing Dextran products
      in
      certain overseas markets, such as India, China and Russia are being explored
      by
      management. Expanding current market opportunities and the potential for new
      market penetration has led management to make plant refurbishments and the
      expansion of production capacity a priority for fiscal year 2007 with respect
      to
      Dextran Products operations.




Research
      and
      development of the Company’s human pharmaceutical products is coordinated at the
      Dextran Products facility. Ushercell, the Company’s leading human pharmaceutical
      compound, is a high molecular weight Cellulose Sulphate envisioned for topical
      vaginal use primarily in the prevention of unplanned pregnancies, as well as
      the
      transmission of AIDS and other sexually transmitted diseases. Multiple clinical
      trials have been completed, and additional trials have commenced or are being
      actively planned, to evaluate various aspects of the use of Cellulose Sulphate
      as a contraceptive gel with antiviral capabilities. The Company also intends
      to
      continue exploring the use of Ushercell as a treatment for Bacterial Vaginosis
      (BV), the most common vaginal disorder among reproductive-age women. If
      effective, BV treatment may present an opportunity for commercial viability
      of
      Ushercell in advance of the completion of the much lengthier testing required
      for its use as an antiviral or contraceptive gel.




11





***Chemdex,
      Vet Labs and the Joint Venture Business***




During
      approximately one month of the 2005 fiscal year, the Company also engaged in
      the
      finished product veterinary pharmaceutical business through its United States
      subsidiary Chemdex, which, in turn, conducted its operations through its
      subsidiary, Vet Labs. On December 1, 1992, Vet Labs and Sparhawk Laboratories
      Inc. entered into a Joint Venture for the purpose of manufacturing and selling
      veterinary pharmaceutical products. On January 13, 2004, the Company, Chemdex
      and Vet Labs entered into an Asset Purchase Agreement with Sparhawk pursuant
      to
      which the Company agreed to sell its finished product veterinary pharmaceutical
      business, including substantially all of the assets of Vet Labs and its
      ownership interest in the Joint Venture, to Sparhawk for $5,500,000 in cash.
      The
      sale was completed on March 4, 2004. Simultaneously with the closing, Chemdex
      advanced $350,000 to Sparhawk in exchange for an unsecured subordinated
      promissory note bearing interest at 13% per annum and a warrant to purchase
      4%
      of the equity of Sparhawk. The promissory note is payable in full on March
      4,
      2009. Interest is payable annually, but can be deferred and added to the
      principal balance of the promissory note each year at Sparhawk’s discretion. The warrant becomes exercisable on March 5, 2009 and
      expires at the earlier of payment in full of the promissory note or March 4,
      2014. Chemdex also entered into a supply agreement with Sparhawk to supply
      ferric hydroxide and hydrogenated dextran solution to Sparhawk on an exclusive
      basis in the United States for 10 years. In connection with the sale, the
      litigation involving the Joint Venture, *Sparhawk
      Laboratories, Inc. v. Veterinary Laboratories, Inc., et al* ,
      Case
      No. 02CV07426, County of Johnson, State of Kansas, was settled, and a Motion
      of
      Approval of Settlement and Stipulation of Dismissal with Prejudice was filed
      with the Court on March 4, 2004.




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




**Results
      of Operations**




***Fiscal
      Year ended January 31, 2006 compared to Fiscal Year ended January 31, 2005
      compared to Fiscal Year ended January 31, 2004***


**FY
                2006**
            
            **FY
                2005**
            
            **FY
                2004**Net
                income (loss)
            
            $
            (1,489,053
            )
            $
            1,139,911
            
            $
            (5,999
            )Earnings
                (loss) per share
            
            
            (0.49
            )
            
            0.38
            
            
            (0.00
            )





The
      fiscal
      year 2006 net loss is primarily due to the decrease in gross margin at Dextran
      Products, primarily a result of the continued increase in value of the Canadian
      dollar relative to the United States dollar, as well as increased research
      and
      development costs. The fiscal year 2005 increase in net income was attributable
      to the gain on sale of the Vet Labs assets. This gain was partially offset
      by an
      increased tax provision.





**Fiscal
                Years****Income
                (loss) before**
              **income
                taxes**
            
            **FY
                2006**
            
            **FY
                2005**
            
            **FY
                2004**
            
            **06
                v 05**
            
            **05
                v 04****(%
                increase (decrease)**Consolidated
            
            $
            (1,308,296
            )
            $
            1,706,777
            
            $
            (395,967
            )
            
            (177
            %)
            
            531
            %Dextran
                Products
            
            
            (463,989
            )
            
            256,169
            
            
            58,703
            
            
            (281
            %)
            
            336
            %Chemdex
            
            
            (73,158
            )
            
            2,093,478
            
            
            (63,029
            )
            
            (103
            %)
            
            3,421
            %





12





The
      United
      States dollar continued to decline in value relative to the Canadian dollar
      during fiscal year 2006, which negatively affected gross margins at Dextran
      Products, since the majority of its revenue is denominated in United States
      dollars while the majority of its cost of sales is denominated in Canadian
      dollars. Therefore, when the value of the Canadian dollar increases in relation
      to the United States dollar, margins decrease. Exchange rate fluctuations
      resulted in a 3% decrease in margins at Dextran Products in fiscal year 2006
      compared to a 4% decrease in fiscal year 2005. The fiscal year 2005 improvement
      in operating results is primarily attributable to the gain on sale of the Vet
      Labs assets at Chemdex and the reduction in the foreign exchange loss at Dextran
      Products. Dextran Products realized a foreign exchange gain in fiscal year
      2005
      because it had a net liability exposure to the United States dollar.




*Dextran
      Products* .
      As
      mentioned above, the continued increase in the Canadian dollar relative to
      the
      United States dollar resulted in increased cost of sales, since most of
      Dextran’s sales are denominated in United States dollars, while its costs are
      primarily denominated in Canadian dollars. While cost savings were realized
      in
      general and administrative expenses, these were largely offset by the rise
      of
      the Canadian dollar, as well as increased research and development expenses
      and
      depreciation. The fiscal year 2005 increase in income before income taxes was
      primarily a result of the foreign exchange gain described above. In addition,
      there was an increase in investment income because of the purchase of marketable
      securities. These increases were partially offset by a decrease in gross margin
      and increased selling, general and administrative expenses.




*Chemdex* .
      The
      income before taxes at Chemdex for fiscal year 2006 decreased from the prior
      year as fiscal year 2005 included both the gain on sale of Vet Labs, as well
      as
      one month of Vet Labs joint venture operations. The fiscal year 2005 increase
      in
      income before income taxes was due to the gain on the sale of the Vet Labs
      assets. Since March 4, 2004, the only operations for Chemdex have been the
      supply of raw materials to Sparhawk.





**Fiscal
                Years****Sales**
            
            **FY
                2006**
            
            **FY
                2005**
            
            **FY
                2004**
            
            **06
                v 05**
            
            **05
                v 04****(%
                increase (decrease)**Consolidated
            
            $
            5,265,209
            
            $
            6,372,359
            
            $
            14,092,189
            
            
            (17
            )%
            
            (55
            )%Dextran
                Products
            
            
            4,730,987
            
            
            4,916,213
            
            
            4,742,519
            
            
            (4
            )%
            
            4
            %Percentage
                of Company sales
            
            
            90
            %
            
            77
            %
            
            34
            %Chemdex
            
            
            534,222
            
            
            1,456,146
            
            $
            9,349,670
            
            
            (63
            )%
            
            (84
            )%Percentage
                of Company sales
            
            
            10
            %
            
            23
            %
            
            66
            %







The
      decrease
      in sales during fiscal year 2006 is due primarily to the fact that the fiscal
      year 2005 included one month of sales in the Vet Labs joint venture, while
      fiscal year 2006 only includes raw materials sales to Sparhawk. The significant
      decrease in sales during fiscal year 2005 is due to the sale of the Vet Labs
      business on March 4, 2004. This business represented virtually all of the
      Chemdex operating segment.




*Dextran
      Products* .
      Dextran
      Products’ sales decreased by 4% in fiscal year 2006 compared to the prior year.
      Demand for Dextran and related products remained consistent with prior fiscal
      years.




*Chemdex* .
      In
      fiscal year 2006, sales at Chemdex to Sparhawk remained consistent with the
      prior year. As described above, the finished goods veterinary pharmaceutical
      business was sold on March 4, 2004 resulting in the significant decline in
      sales
      for this operating segment in fiscal year 2005 compared to fiscal year 2004.
      Under a supply agreement with Sparhawk, Chemdex continues to supply raw
      materials for the manufacture of bulk iron dextran by Sparhawk. Fiscal year
      2005
      sales at Chemdex included one month of sales for the finished goods veterinary
      pharmaceutical business, which accounts for the decline in sales compared fiscal
      year 2006.





13




**Fiscal
                Years****Gross
                profit**
            
            **FY
                2006**
            
            **FY
                2005**
            
            **FY
                2004**
            
            **06
                v 05**
            
            **05
                v 04****(%
                increase (decrease)**Consolidated
            
            $
            429,185
            
            $
            1,516,418
            
            $
            2,785,865
            
            
            (72
            )%
            
            (46
            )%Percentage
                of sales
            
            
            8
            %
            
            24
            %
            
            20
            %Dextran
                Products
            
            $
            408,671
            
            $
            1,037,368
            
            $
            1,153,659
            
            
            (61
            )%
            
            (10
            )%Percentage
                of sales
            
            
            8
            %
            
            21
            %
            
            24
            %Chemdex
            
            $
            20,514
            
            $
            279,827
            
            $
            1,597,345
            
            
            (93
            )%
            
            (82
            )%Percentage
                of sales
            
            
            4
            %
            
            19
            %
            
            17
            %




The
      decline
      in gross profit in fiscal year 2006 resulted from the increased cost of sales,
      which was exacerbated by the continued increase in value of the Canadian dollar
      compared to the United States dollar. The fiscal year 2005 decrease in gross
      profit resulted from the decrease in sales from the Chemdex operating segment
      due to the sale of the finished goods veterinary pharmaceutical business. The
      increase in gross profit percentage, in fiscal year 2005, is a result of the
      finished goods veterinary pharmaceutical business being a lower margin business
      than the Dextran Products operating segment.




*Dextran
      Products* .
      In
      fiscal year 2006, the decrease in gross profit compared to fiscal year 2005
      was
      due to several factors, including supplier price increases, increased equipment
      repairs and building supply costs, and increased depreciation charged to cost
      of
      sales due to equipment acquisitions during the year. These increases were
      exacerbated by the continued increase in the Canadian dollar relative to the
      United States dollar. The majority of Dextran Products’ costs are incurred in
      Canadian dollars, while the majority of its sales are in United States dollars.
      Therefore, as the value of the Canadian dollar rises in relation to the United
      States dollar, Dextran Products’ margins decrease. Exchange rate fluctuations
      have resulted in a 3%, 4% and an 8% decrease in margins at Dextran Products
      in
      fiscal years 2006, 2005 and 2004, respectively. During the fiscal year 2005,
      excluding the impact of exchange rates, Dextran Products realized an increase
      in
      margins due to cost control measures over materials and increased productivity.
      A modest price increase for certain products also occurred at Dextran Products
      in fiscal year 2005.




*Chemdex* .
      In
      fiscal year 2006, Chemdex operations consisted entirely of raw material sales
      to
      Sparhawk, while in fiscal year 2005, Chemdex operations included approximately
      one month of results from the finished goods veterinary pharmaceutical business.
      The gross margin decrease from fiscal year 2004 to fiscal year 2005 resulted
      primarily from having a full year of finished goods veterinary pharmaceutical
      business in 2004 compared with only one month in fiscal year 2005.





**Fiscal
                Years****FY
                2006**
            
            **FY
                2005**
            
            **FY
                2004**
            
            **06
                v 05**
            
            **05
                v 04****(%
                increase (decrease)**Selling,
                promotion, general andAdministrative
                expenses
            
            $
            1,550,735
            
            $
            1,594,580
            
            $
            2,493,488
            
            
            (3
            )%
            
            (36
            )%




In
      fiscal
      year 2006, overall selling, promotion and general and administrative expenses
      remained consistent with fiscal year 2005. During fiscal year 2006
      administrative expenses decreased slightly in Dextran Products, although this
      was offset by the continuing rise in the Canadian dollar. General and
      administrative expenses in Chemdex decreased in fiscal year 2006 due primarily
      to the one month of operations included in fiscal year 2005. The fiscal year
      2005 decrease in selling, promotion, general and administrative expenses is
      a
      result of the sale of the finished goods veterinary pharmaceutical business
      in
      March 2004. The Dextran Products operating segment experienced an increase
      in
      selling, promotion, general and administrative expenses in fiscal year 2005.
      These costs were incurred in Canadian dollars, resulting in increased expenses
      upon translation to United States dollars due to the significant rise in the
      Canadian dollar as discussed above.





14




**Fiscal
                Years****Research
                and development**
            
            **FY
                2006**
            
            **FY
                2005**
            
            **FY
                2004**
            
            **06
                v 05**
            
            **05
                v 04****(%
                increase (decrease)**Research
                and developmentExpenditures
            
            $
            215,482
            
            $
            127,847
            
            $
            73,635
            
            
            68
            %
            
            74
            %Investment
                tax credits
            
            
            (9,681
            )
            
            (13,105
            )
            
            (12,684
            )
            
            (26
            )%
            
            3
            %Net
                research and development expense
            
            
            205,801
            
            
            114,742
            
            
            60,951
            
            
            79
            %
            
            88
            %




As
      in
      fiscal year 2005, the Company’s research and development expenditures increased
      in fiscal year 2006 due to additional product development activities performed
      by the Company and funded outside of its partnership relationships. The majority
      of this increase continues to relate to funding of a pilot clinical study on
      the
      use of cellulose sulphate for the treatment of bacterial vaginosis. This
      clinical study is related to an alternate use of cellulose sulphate and
      therefore is outside the scope of funding provided by the Company’s research and
      development partners for the investigation of this product as a contraceptive
      gel with antiviral properties. The current stage of the cellulose sulphate
      project is such that a lesser portion of development is being performed in-house
      and significant funding from research and development partners for the current
      phase of the project is expected to continue at necessary levels for the
      foreseeable future. The Company’s research and development expenditures are
      expected to increase in fiscal year 2007 due to additional product development
      activities the Company expects to perform and fund outside of its partnership
      relationships.




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




**Fiscal
                Years****FY
                2006**
            
            **FY
                2005**
            
            **FY
                2004**
            
            **06
                v 05**
            
            **05
                v 04****(%
                increase (decrease)****Depreciation
                and amortization expense**
            
            $
            543,023
            
            $
            513,095
            
            $
            617,685
            
            
            6
            %
            
            (17
            )%





The
      increase
      in depreciation and amortization in fiscal year 2006 is due primarily to the
      increased investments in capital equipment during the year, and the increase
      in
      the value of the Canadian dollar relative to the United States dollar. The
      fiscal year 2005 decrease in depreciation and amortization expense is
      attributable to the sale of the finished goods veterinary pharmaceutical
      business in March 2004. Included in the depreciation and amortization expense
      above are allocations to Cost of goods sold in the amount of $481,863 (2005
      -
      $468,212; 2004 - $563,631).





**Fiscal
                Years****FY
                2006**
            
            **FY
                2005**
            
            **FY
                2004**
            
            **06
                v 05**
            
            **05
                v 04****(%
                increase (decrease)****Interest
                expense**
            
            $
            81,509
            
            $
            91,210
            
            $
            133,382
            
            
            (11
            )%
            
            (32
            )%





As
      in fiscal
      year 2005, the decrease in interest expense in fiscal year 2006 is primarily
      attributable to a decrease in long-term debt and capital lease obligations,
      as
      well as the associated decrease in imputed interest due to the continuing
      repayment of non-interest bearing long-term debt. In fiscal year 2005, the
      share
      value guarantee payable was paid in full on March 4, 2004 when the Joint Venture
      operations were sold.





15




**Fiscal
                Years****FY
                2006**
            
            **FY
                2005**
            
            **FY
                2004**
            
            **06
                v 05**
            
            **05
                v 04****(%
                increase (decrease)****Foreign
                exchange gain (loss)**
            
            $
            18,139
            
            $
            46,172
            
            $
            (447,602
            )
            
            (61
            )%
            
            110
            %





In
      fiscal
      year 2006, the decrease in the foreign exchange gain was due primarily to
      Dextran Products’ decreasing exposure to the United States dollar. In fiscal
      year 2005, the increase in foreign exchange gain at Dextran Products was due
      to
      the significant decline in Dextran Products’ net exposure to the United States
      dollar. Dextran Products has a net liability exposure to the United States
      dollar because intercompany payables denominated in United States dollars exceed
      its United States dollar denominated accounts receivable balance. Dextran
      Products realized a foreign exchange gain in both fiscal years 2006 and 2005
      because the Canadian dollar increased in value relative to the United States
      dollar. During fiscal year 2004, Dextran Products had large intercompany
      receivables denominated in United States dollars, and experienced a foreign
      exchange loss because the value of the Canadian dollar increased relative to
      the
      United States dollar. A large portion of these intercompany receivables were
      repaid in March 2004 when the Joint Venture operations were sold





**Fiscal
                Years****FY
                2006**
            
            **FY
                2005**
            
            **FY
                2004**
            
            **06
                v 05**
            
            **05
                v 04****(%
                increase (decrease)****Interest
                and other income**
            
            
            148,166
            
            
            130,131
            
            
            7,645
            
            
            14
            %
            
            1602
            %





In
      fiscal
      year 2006, the Company earned interest income of $148,166 from the investment
      of
      the proceeds from the sale of Vet Labs assets (2005 - $130,131). In fiscal
      year
      2004, there were no significant investment assets, therefore no significant
      investment income was earned.





**Fiscal
                Years****Tax
                provision (recovery)**
            
            **FY
                2006**
            
            **FY
                2005**
            
            **FY
                2004**
            
            **06
                v 05**
            
            **05
                v 04****(%
                increase (decrease)**Consolidated
            
            $
            180,757
            
            $
            566,866
            
            $
            (389,968
            )
            
            (68
            )%
            
            245
            %Dextran
                Products
            
            
            248,106
            
            
            (193,134
            )
            
            110,032
            
            
            228
            %
            
            (276
            )%Chemdex
            
            
            (123,950
            )
            
            637,000
            
            
            (500,000
            )
            
            (119
            )%
            
            227
            %




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




The
      fiscal
      year 2005 decrease in tax provision at Dextran Products was a result of a
      decrease in deferred tax liabilities. The tax provision at Dextran Products
      in
      fiscal year 2004 exceeded its income before taxes because a significant portion
      of the foreign exchange loss is related to intercompany financing and
      consequently is deductible only against capital gains. The Canadian operations
      continue to have significant research and development tax pools to offset
      current taxes payable.




The
      fiscal
      year 2006 tax recovery at Chemdex is due to a reduction in the valuation
      allowance on a deferred tax item that was realized during the year. The fiscal
      year 2005 tax provision at Chemdex was a result of the gain recognized on the
      sale of the Vet Labs assets. The fiscal year 2004 Chemdex tax benefit was
      recorded because there was no longer uncertainty as to the ability of Chemdex
      to
      use non-operating losses following the sale of the Vet Labs assets for a gain
      subsequent to the end of fiscal year 2004.







16





**Liquidity
      and Capital Resources**




As
      of January
      31, 2006, the Company had cash and cash equivalents of $971,451, compared to
      $2,401,051 at January 31, 2005. In fiscal year 2006, the Company used cash
      of
      $425,185 in its operating activities, compared to using $310,351 for fiscal
      year
      2005. Although there was a significant increase in net income in fiscal year
      2005, this increase resulted from the gain on sale of the finished products
      veterinary pharmaceutical business, which proceeds were classified as an
      investing activity. The decrease in cash generated from operations in fiscal
      year 2006 as compared to fiscal year 2005 is because of the decrease in
      earnings. Depreciation and amortization continues to be a large non-cash expense
      of the Company.




Working
      capital declined to $2,190,321 and the current ratio declined to 2.76 to 1
      as of
      January 31, 2006, compared to $3,691,418 and 3.8 to 1 as of January 31,
      2005.




Management
      expects the primary source of its future capital needs to be a combination
      of
      existing cash and cash equivalent reserves generated from the sale of the Vet
      Labs assets, company earnings and borrowings. The Company, at present, does
      not
      have any material commitments for capital expenditures, although Management
      intends to continue the plant refurbishment process at Dextran Products in
      Toronto.




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




At
      January
      31, 2006, the Company had accounts receivable of $744,720 and inventory of
      $1,549,544, compared to $922,267 and $1,516,893, respectively, at January 31,
      2005. The decrease in accounts receivable at January 31, 2006 is due to the
      timing of payments. At January 31, 2006, the Company had accounts payable of
      $574,270, compared to $463,579 at January 31, 2005. The increase as at January
      31, 2006 was due primarily to the timing of supplier payments. During fiscal
      year 2006, capital expenditures totaled $418,246, as compared to $182,691 in
      fiscal year 2005. The majority of the capital expenditures were for production
      equipment at the Dextran Products plant in Toronto in both these fiscal years.
      Management intends to continue its plant refurbishment and expansion plan in
      fiscal year 2007, and expects capital expenditures to increase in that
      period.




During
      fiscal
      year 2006, the Company decreased its investment in medium-term,
      investment-grade, debt securities and increased its investment in fixed income
      mutual funds, and diversified royalty and income trust units, all denominated
      in
      Canadian dollars. The medium-term debt securities have maturities ranging from
      February 6, 2006 to June 7, 2007. Unrealized gains and losses will occur as
      the
      market interest rate varies. Management does not expect significant gains or
      losses in the future due to the relatively short term to maturity of the debt
      securities. Management plans to hold these debt securities to maturity unless
      such funds are needed for working capital or other cash needs such as the plant
      refurbishments.




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




Dextran
      Products has a Cdn. $1,250,000 (U.S. $1,097,000) line of credit, of which none
      was utilized at January 31, 2006. Cdn. $30,000 (U.S. $24,000) of this line
      of
      credit was utilized at January 31, 2005. This line of credit bears interest
      at
      the Canadian banks’ prime lending rate plus 0.50% (2006 - 5.25%; 2005 - 5%).
      This indebtedness is collateralized by a general security agreement over the
      Company’s assets and a collateral mortgage of Cdn. $500,000 on the Dextran
      Products building in Toronto.  Subsequent
      to the year end, the Company secured an additional Cdn $500,000 fixed rate
      term
      loan to fund capital purchases, with interest at 0.75% over Canadian banks’
prime lending rate.




17





The
      decrease
      in capital lease obligations during fiscal year 2006 was due to repayments
      on
      capital leases. The majority of the capital lease obligations will be repaid
      during fiscal year 2007. The Company entered into one new capital lease
      obligation at Dextran Products during fiscal year 2005, for a piece of office
      equipment. Capital lease obligations are due over the next five years. Dextran
      Products entered into one new long-term debt obligation during fiscal year
      2005,
      which related to the buyout of a piece of office equipment.




Chemdex
      entered into a long-term debt obligation on September 19, 2003, which related
      to
      the redemption of the 10% minority interest in Chemdex. The redemption amount
      was $146,500, which was paid in 25 equal monthly installments of $5,860,
      commencing on the redemption date. Since this installment contract was
      non-interest bearing, it was discounted using a discount rate of 9%. This
      installment contract was fully repaid by January 31, 2006.




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




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




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




**Related
      Party Transactions**




In
      August
      1997, the Company loaned Thomas C. Usher, formerly its Vice-Chairman, Director
      of Research and Development, a member of its Board of Directors and the
      beneficial owner of greater than 5% of the outstanding common shares of the
      Company, $691,500 at an interest rate equal to the United States’ bank prime
      rate plus 1.50% (the “Loan”). The Loan was used to partially fund a $1,000,000
      payment to the State of Florida in order to allow Thomas C. Usher to regain
      possession of 430,000 Common Shares of the Company then held by the State as
      collateral security relating to the liquidation of insurance companies formerly
      owned by Thomas C. Usher. Repayment of the Loan is accomplished by monthly
      payments and through offsets by the Company against royalty payments due Thomas
      C. Usher pursuant to intellectual property license agreements and, in the past,
      bonus payments, if any, granted Thomas C. Usher as an employee of the Company.
      The amount outstanding under the Loan as of January 31, 2006 was $323,972,
      as
      compared to $373,373 at January 31, 2005, including accrued interest. The
      Company has taken a cumulative provision of $292,860 against accrued interest
      on
      this loan at January 31, 2006, compared to a cumulative provision of $264,543
      at
      January 31, 2005. Thomas C. Usher passed away on February 26, 2005. Obligations
      with respect to the Loan transferred to the estate of Thomas C. Usher. The
      Company continues to be obligated to make royalty payments pursuant to the
      license agreements, and intends to continue to offset such payments against
      the
      Loan.




In
      August
      1999, Thomas C. Usher personally assumed all of the assets and liabilities
      of
      Novadex Corp., including the balance of receivables (the “Receivables”) due to
      the Company from Novadex Corp. The Receivables have no specific repayment terms.
      The total outstanding amount of the Receivables as of January 31, 2006 was
      $207,599, as compared to $285,037 at January 31, 2005. Thomas C. Usher also
      owed
      $250,000 to a subsidiary of the Company, Novadex International Limited, as
      of
      January 31, 2006, pursuant to a non-interest bearing loan with no specific
      repayment terms. The outstanding amount of this loan has not changed from
      January 31, 2005. The amounts continue to remain owing from the estate of Thomas
      C. Usher.




Thomas
      C.
      Usher had pledged 307,909 common shares of the Company as security for these
      amounts owing to the Company. These common shares had a market value of
      $2,315,476 at January 31, 2006, based on the closing price of the Company’s
      common shares on the NASDAQ SmallCap market on January 31, 2006. The Company
      intends to continue to hold the pledged assets as collateral until the amounts
      owing discussed above are repaid.




18





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




The
      Company
      also has an outstanding loan payable to Ruth Usher, a member of the Board of
      Directors until her retirement on October 31, 2003, the beneficial owner of
      greater than 5% of the outstanding common shares of the Company, a former
      director, and the widow of Thomas C. Usher. The amount due from the Company
      pursuant to this loan decreased to $675,919 at January 31, 2006 from $681,304
      at
      January 31, 2005 due to interest charges less monthly payments by the Company.
      The Company is required to make blended monthly payments of $5,000.




**Off-Balance
      Sheet Arrangements**




The
      Company
      has no off-balance sheet arrangements.




**Tabular
      Disclosure of Contractual Obligations**




As
      of January
      31, 2006, future minimum cash payments due under contractual obligations,
      including, among others, the Dextran Products line of credit, the loan payable
      to Ruth Usher, and capital lease agreements, are as follows:





**Payment
                due by period****Less
                than**
            
            
            
            
            
            **More
                than****Contractual
                Obligations**
            
            **Total**
            
            **1
                year**
            
            **1-3
                years**
            
            **3-5
                years**
            
            **5
                years**Long-term
                debt obligations (1)
            
            $
            681,811
            
            $
            61,473
            
            $
            122,946
            
            $
            121,473
            
            $
            375,919Capital
                lease obligations (2)
            
            
            179,150
            
            
            161,741
            
            
            12,661
            
            
            4,748
            
            
            —Operating
                lease obligations (3)
            
            
            322
            
            
            322
            
            
            
            
            
            —
            
            
            —Purchase
                obligations
            
            
            189,209
            
            
            189,209
            
            
            —
            
            
            —
            
            
            —Revolving
                loans (4)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            $
            1,050,492
            
            $
            412,745
            
            $
            135,607
            
            $
            126,221
            
            $
            375,919




1.
            Consists
                of:(a)
            Note
                payable in quarterly payments of Cdn. $419 maturing September 2010;
                and(b)
            Amounts
                due to shareholder which bear interest at the Canadian banks’ prime
                lending rate plus 1.5%, with required minimum monthly payments, including
                interest, of $5,000.2.
            Consists
                of capital lease obligations for:(a)
            Production
                equipment of Cdn. $154,220 (US $135,399) repayable in monthly
                installments, bearing interest at 9% and maturing November
                2006;(b)
            Production
                equipment of Cdn. $32,671 (US $28,684) repayable in monthly installments,
                bearing interest at 7.59% and maturing November 2006; and(c)
            Office
                equipment of Cdn. $23,298 (US $20,455) repayable in quarterly
                installments, bearing interest at 10.4% and maturing December
                2009.3.
            Consists
                of operating lease obligations for office equipment requiring quarterly
                payments of Cdn. $161 (US $141) terminating June 2006





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





19





**Risk
      Factors**




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




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




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




•
            that
                the Company will not be able to maintain its current research and
                development schedules;•
            that
                the Company will not be able to enter into human clinical trials
                because
                of scientific, governmental or financial reasons, or that it will
                encounter problems in clinical trials that will cause a delay or
                suspension of the development of the product candidate;•
            that
                the developmental product will be found to be ineffective or
                unsafe;•
            that
                government regulations will delay or prevent the product’s marketing for a
                considerable period of time and impose costly procedures upon the
                Company’s activities;•
            that
                the FDA or other regulatory agencies will not approve the product
                or the
                process by which the product is manufactured, or will not do so on
                a
                timely basis; and/or•
            that
                the FDA’s policies may change and additional government regulations and
                policies may be instituted, which could prevent or delay regulatory
                approval of the product.




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




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




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




•
            the
                product is uneconomical or if the market for the product does not
                develop
                or diminishes;•
            the
                Company is not able to enter into arrangements or collaborations
                to
                commercialize and/or market the product;•
            the
                product is not eligible for third-party reimbursement from government
                or
                private insurers;•
            others
                hold proprietary rights that preclude the Company from commercializing
                the
                product;





20




•
            others
                have brought to market similar or superior products;•
            others
                have superior resources to market similar products or
                technologies;•
            government
                regulation imposes limitations on the indicated uses of the product,
                or
                later discovery of previously unknown problems with the product results
                in
                added restrictions on the product or results in the product being
                withdrawn from the market; and/or•
            the
                product has undesirable or unintended side effects that prevent or
                limit
                its commercial use.




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




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




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




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




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




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




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





21





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




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




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




**Critical
      Accounting Policies**




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




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




***Revenue
      Recognition***




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




***Allowance
      for
      Doubtful Accounts***




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





22





***Long-Lived
      Assets***




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




***Deferred
      Tax
      Assets***




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




***The
      Joint
      Venture***




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




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




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




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





23





Since
      Sparhawk is thinly capitalized and highly leveraged, the Company has deferred
      $350,000 of the gain relating to the promissory note receivable from Sparhawk.
      The Company will monitor the financial position of Sparhawk and will recognize
      this deferred gain at such time as Sparhawk’s cash flows from operations are
      sufficient to fund debt service on a full accrual basis.




The
      assets
      and liabilities of Vet Labs and the Joint Venture at January 31, 2004 that
      were
      subject to the Asset Purchase Agreement were reclassified to assets and
      liabilities subject to sale agreement. All liabilities subject to sale agreement
      were current liabilities at January 31, 2004. All assets subject to sale
      agreement at January 31, 2004 were considered current assets because the sale
      closed less than two months after fiscal year-end. Effective January 13, 2004,
      depreciation and amortization of the long-lived assets ceased.




**Changes
      in Accounting Policies**




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




Effective
      February 1, 2003, the Company adopted the fair value accounting method provided
      for under Statement of Financial Accounting Standards No. 123, “Accounting for
      Stock-Based Compensation” in accounting for its employee stock options. The
      adoption of this accounting policy reduced net income by $14,212 in fiscal
      year
      2005 and by $12,370 in fiscal year 2004 as compared to the Company’s previous
      accounting policy of using the intrinsic value method as provided for in
      Accounting Principles Board Opinion (“APB”) No. 25.




**Recent
      Accounting Pronouncements**




In
      December
      2004, the Financial Accounting Standards Board [the "FASB"] issued FASB
      Statement No. 123 (Revised 2004), "Share-Based Payment" ["Statement 123(R)"],
      which is a revision of FASB Statement No. 123, "Accounting for Stock-Based
      Compensation" ["Statement 123"]. Statement 123(R) supercedes APB Opinion No.
      25,
      "Accounting for Stock Issued to Employees" and amends FASB Statement No. 95,
      "Statement of Cash Flows". Generally, the approach in Statement 123(R) is
      similar to the approach described in Statement 123. However, Statement 123(R)
      requires all share-based payments to employees, including grants of employee
      stock options, to be recognized in the income statement based on their fair
      values. Pro forma disclosure is no longer an alternative. Effective February
      1,
      2003, the Company has adopted the fair value accounting method provided for
      under Statement 123 to apply recognition provisions to its employee stock
      options granted, modified or settled after February 1, 2003. Statement 123(R)
      will have no impact on the consolidated financial statements of the
      Company.





In
      November
      2004, the FASB issued Statement 151, "Inventory Costs", which clarifies that
      abnormal amounts of idle facility expense, freight, handling costs and wasted
      materials should be recognized as current-period charges and requires the
      allocation of fixed production overheads to inventory based on the normal
      capacity of the production facilities. This guidance is effective for inventory
      costs incurred during fiscal years beginning after June 15, 2005. The Company
      does not anticipate that this guidance will impact the consolidated financial
      statements of the Company.





FASB
      issued
      Statement No. 152 “Accounting for Real Estate Time-Sharing Transactions” an
      amendment of FASB Statements No. 66 and 67. This Statement amends FASB statement
      No. 66, Accounting for Sales of Real Estate, to reference the financial
      accounting and reporting guidance for real estate time-sharing transactions
      that
      is provided in AICPA Statement of Position. Statement 152 will have no impact
      on
      the consolidated financial statements of the Company.





24





In
      December
      2004, the FASB issued Statement 153, "Exchanges of Nonmonetary Assets", an
      amendment of APB Opinion No. 29, "Accounting for Nonmonetary Transactions".
      Statement 153 is based on the principle that exchanges of nonmonetary assets
      should be measured based on the fair value of the assets exchanged. Statement
      153 eliminates the narrow exception for nonmonetary exchanges of similar
      productive assets and replaces it with a broader exception for exchanges of
      nonmonetary assets that do not have commercial substance. Statement 153 is
      effective for nonmonetary asset exchanges occurring in fiscal periods beginning
      after June 15, 2005. The provisions of this Statement 153 should be applied
      prospectively. The Company does not anticipate that the application of this
      Statement 153 will have an impact on the consolidated financial statements
      of
      the Company.





FASB
      issued
      Statement No. 132 (revised 2003)- Employers’ Disclosures about Pensions and
      Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and
      106 (Issued 12/03), which revises employers’ disclosures about pension plans and
      other postretirement benefit plans. It does not change the measurement or
      recognition of those plans required by FASB Statements No. 87, Employers’
Accounting for Pensions, No. 88, Employers’ Accounting for Settlements and
      Curtailments of Defined Benefit Pension Plans and for Termination Benefits,
      and
      No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions.
      FASB Statement No. 132 will have no impact on the consolidated financial
      statements of the Company.





FASB
      issued
      Statement No. 154 - Accounting Changes and Error Corrections—a replacement of
      APB Opinion No. 20 and FASB Statement No. 3. This Statement replaces APB Opinion
      No. 20, *Accounting
      Changes,* and FASB
      Statement No. 3, *Reporting
      Accounting Changes in Interim Financial Statements,* and
      changes the requirements for the accounting for and reporting of a change in
      accounting principle. This Statement applies to all voluntary changes in
      accounting principle. It also applies to changes required by an accounting
      pronouncement in the unusual instance that the pronouncement does not include
      specific transition provisions. When a pronouncement includes specific
      transition provisions, those provisions should be followed. The Company does
      not
      anticipate that this guidance will impact the consolidated financial statements
      of the Company.





FASB
      issued
      Statement No. 155 - Accounting for Certain Hybrid Financial Instruments—an
      amendment of FASB Statements No. 133 and 140. This Statement amends FASB
      Statements No. 133, *Accounting
      for Derivative Instruments and Hedging Activities,* and No.
      140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities.* This
      Statement resolves issues addressed in Statement 133 Implementation Issue No.
      D1, “Application of Statement 133 to Beneficial Interests in Securitized
      Financial Assets.” FASB Statement No. 155 will have no impact on the
      consolidated financial statements of the Company.





SFAS
      No. 156
      - Accounting for Servicing of Financial Assets—an amendment of FASB Statement
      No. 140. This Statement amends FASB Statement No. 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities,* with
      respect to the accounting for separately recognized servicing assets and
      servicing liabilities. FASB Statement No. 156 will have no impact on the
      consolidated financial statements of the Company.





ITEM
      7A.  QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




25





**Exchange
      Rate Sensitivity**




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




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





**Expected
                Maturity Date****Fair****1/31/07**
            
            **1/31/08**
            
            **1/31/09**
            
            **1/31/10**
            
            **1/31/11**
            
            **Thereafter**
            
            **Total**
            
            **Value****(US$
                Equivalent)****Assets:**Short-term
                investments:Fixed
                rate ($Cdn.)
            
            
            731,977
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            731,977
            
            
            735,029Average
                interest rate
            
            
            3.00
            %
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            3.00
            %Marketable
                securities:Fixed
                rate ($Cdn.)
            
            
            1,469,803
            
            
            677,305
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,147,107
            
            
            2,048,892Average
                interest rate
            
            
            3.00
            %
            
            2.86
            %
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2.93
            %**Liabilities:**Long-term
                debt:Fixed
                rate ($Cdn.)
            
            
            169,441
            
            
            5,945
            
            
            6,595
            
            
            7,316
            
            
            —
            
            
            —
            
            
            189,297
            
            
            171,773Average
                interest rate
            
            
            8.81
            %
            
            10.43
            %
            
            10.43
            %
            
            10.43
            %
            
            —
            
            
            —
            
            
            8.98
            %





26





**Interest
      Rate Sensitivity**




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





**Expected
                Maturity Date****1/31/07**
            
            **1/31/08**
            
            **1/31/09**
            
            **1/31/10**
            
            **1/31/11**
            
            **Thereafter**
            
            **Total**
            
            **Fair**
              **Value****(US$
                Equivalent)****Assets:**Short-term
                investments:Fixed
                rate ($Cdn.)
            
            
            731,977
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            731,977
            
            
            735,029Average
                interest rate
            
            
            3.00
            %
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            3.00
            %Marketable
                securities:Fixed
                rate ($Cdn.)
            
            
            1,469,803
            
            
            677,305
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,147,107
            
            
            2,048,892Average
                interest rate
            
            
            3.00
            %
            
            2.86
            %
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2.93Notes
                receivable:Variable
                rate ($US)
            
            
            60,274
            
            
            65,397
            
            
            70,956
            
            
            76,897
            
            
            50,177
            
            
            —
            
            
            323,793
            
            
            232,793Average
                interest rate
            
            
            8.50
            %
            
            8.50
            %
            
            8.50
            %
            
            8.50
            %
            
            8.50
            %
            
            —
            
            
            8.50
            %**Liabilities:**Long-term
                debt:Fixed
                rate ($Cdn.)
            
            
            169,441
            
            
            5,945
            
            
            6,595
            
            
            7,316
            
            
            —
            
            
            —
            
            
            189,297
            
            
            171,773Average
                interest rate
            
            
            8.81
            %
            
            10.43
            %
            
            10.43
            %
            
            10.43
            %
            
            —
            
            
            —
            
            
            8.98
            %Variable
                rate ($US)
            
            
            2,089
            
            
            2,267
            
            
            2,459
            
            
            2,668
            
            
            2,895
            
            
            668,925
            
            
            681,305
            
            
            681,305Average
                interest rate
            
            
            8.50
            %
            
            8.50
            %
            
            8.50
            %
            
            8.50
            %
            
            8.50
            %
            
            8.50
            %
            
            8.50
            %





27





ITEM
      8.   FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA




**Polydex
      Pharmaceuticals Limited**


**Quarterly
      Financial Highlights**


**January
      31, 2006**





**Fourth
                Quarter**
            
            **Third
                Quarter**
            
            **Second
                Quarter**
            
            **First
                Quarter****Fiscal
                Year**
            
            **Fiscal
                Year**
            
            **Fiscal
                Year**
            
            **Fiscal
                Year****2006**
            
            **2005**
            
            **2006**
            
            **2005**
            
            **2006**
            
            **2005**
            
            **2006**
            
            **2005**Sales
                from continuing operations
            
            
            1,606,980
            
            
            1,306,297
            
            
            1,062,075
            
            
            1,205,859
            
            
            1,273,470
            
            
            1,338,409
            
            
            1,322,684
            
            
            2,521,794Gross
                profit
            
            
            107,042
            
            
            291,431
            
            
            72,800
            
            
            99,960
            
            
            126,024
            
            
            361,935
            
            
            123,319
            
            
            763,092Net
                income (loss) from continuing operations
            
            
            (663,541
            )
            
            107,036
            
            
            (261,451
            )
            
            (240,552
            )
            
            (228,432
            )
            
            12,759
            
            
            (335,629
            )
            
            1,260,668Net
                income (loss) per common share
            
            
            (0.22
            )
            
            0.04
            
            
            (0.09
            )
            
            (0.08
            )
            
            (0.07
            )
            
            —
            
            
            (0.11
            )
            
            0.42





28





**MANAGEMENT'S
      REPORT**





The
      accompanying consolidated financial statements are the responsibility of
      management and have been prepared by management in conformity with United States
      generally accepted accounting principles and have been approved by the Board
      of
      Directors. In preparing these consolidated financial statements, management
      selects appropriate accounting policies and uses its judgement and best
      estimates to report events and transactions as they occur. Management has
      determined such amounts on a reasonable basis in order to ensure that the
      consolidated financial statements are presented fairly, in all material
      respects. Financial data included throughout the Annual Report is prepared
      on a
      basis consistent with that of the consolidated financial
      statements.





In
      fulfilling its responsibilities, management has developed a system of internal
      accounting controls designed to provide reasonable assurance, at a reasonable
      cost, that assets are safeguarded from loss and unauthorized use and that
      financial records are reliable for the purpose of preparing the consolidated
      financial statements. This system is supported by written policies and
      procedures for key business activities; the hiring of qualified, competent
      staff; and by a continuous planning and monitoring system.





Schwartz
      Levitsky Feldman LLP, the independent auditors appointed by the shareholders
      of
      the Company, have audited the consolidated financial statements for the fiscal
      year ended January 31, 2006 in accordance with the standards of the Public
      Company Accounting Oversight Board (United States) and they provide an objective
      independent opinion regarding the fair presentation of reported operating
      results and financial position in accordance with generally accepted accounting
      principles. The prior two fiscal years were audited by Ernst & Young
      LLP.





The
      Board
      of Directors is responsible for ensuring that management fulfills its
      responsibility for financial reporting and is ultimately responsible for
      reviewing and approving the consolidated financial statements. The Board carries
      out the responsibility principally through its Audit Committee. The members
      of
      the Audit Committee are independent directors. The Audit Committee meets with
      financial management and the independent auditors to review accounting,
      auditing, internal accounting controls and financial reporting matters. Schwartz
      Levitsky Feldman LLP has full and free access to the Audit
      Committee.







**George
      G. Usher**  **Sharon
      Wardlaw**


Chairman
      and Chief Executive Officer  Chief
      Financial Officer





29





REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
      the
      Shareholders of


Polydex
      Pharmaceuticals Limited





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





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





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





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





“ SCHWARTZ
      LEVITSKY FELDMAN LLP”





Toronto,
      Ontario, Canada


April 12, 2006
            CharteredAccountants




30








**REPORT
      OF INDEPENDENT AUDITORS**





To
      the
      Shareholders of


**Polydex
      Pharmaceuticals Limited**





We
      have
      audited the accompanying consolidated balance sheets of **Polydex
      Pharmaceuticals Limited** as
      of
      January 31, 2005 and 2004 and the related consolidated statements of
      shareholders' equity, operations and cash flows for each of the years in the
      two-year period ended January 31, 2005. 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 the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. We were not engaged to perform
      an
      audit of the Company's internal control over financial reporting. Our audits
      included consideration of internal control over financial reporting as a basis
      for designing audit procedures that are appropriate in the circumstances, but
      not for the purpose of expressing an opinion on the effectiveness of the
      Company's internal control over financial reporting. Accordingly, we express
      no
      such opinion. An audit also includes examining, on a test basis, evidence
      supporting the amounts and disclosures in the financial statements, assessing
      the accounting principles used and significant estimates made by management,
      and
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of **Polydex
      Pharmaceuticals Limited** as of
      January 31, 2005 and 2004, and the consolidated results of its operations
      and its cash flows for each of the years in the two-year period ended
      January 31, 2005 in conformity with United States generally accepted
      accounting principles.








Toronto,
      Canada, / s/
      Ernst
& Young LLP


March
      10,
      2005. Chartered
      Accountants








31





**Polydex
      Pharmaceuticals Limited**





**CONSOLIDATED
      BALANCE SHEETS**


[Expressed
      in United States dollars]





As
      at
      January 31


**2006**
            
            **2005**$
            
            $**ASSETS****Current**Cash
                and cash equivalents*[note
                3]*
            
            
            **971,451**
            
            
            2,401,051Trade
                accounts receivable*[note
                18]*
            
            
            **744,720**
            
            
            922,267Interest
                receivable*[note
                12]*
            
            
            **41,511**
            
            
            41,511Inventories*[note
                4]*
            
            
            **1,549,544**
            
            
            1,516,893Prepaid
                expenses and other current assets
            
            
            **129,362**
            
            
            115,542**Total
                current assets**
            
            
            **3,436,588**
            
            
            4,997,264Property,
                plant and equipment, net*[note
                5]*
            
            
            **3,280,724**
            
            
            3,124,185Patents
                and intangible assets, net*[note
                6]*
            
            
            **61,591**
            
            
            68,959Investments
                available for sale*[note
                7]*
            
            
            **2,638,441**
            
            
            1,909,305Due
                from shareholder*[note
                8]*
            
            
            **488,711**
            
            
            643,867Assets
                held for sale
            
            
            **4,390**
            
            
            12,085Promissory
                note, net of deferred gain of $350,000*[note
                12]*
            
            
            **—**
            
            
            **—**Deferred
                tax assets*[note
                14]*
            
            
            **—**
            
            
            56,208**9,910,445**
            
            
            10,811,873**LIABILITIES
                AND SHAREHOLDERS' EQUITY****Current**Bank
                indebtedness*[note
                9]*
            
            
            **—**
            
            
            24,170Accounts
                payable
            
            
            **574,270**
            
            
            463,579Accrued
                liabilities
            
            
            **360,150**
            
            
            365,267Customer
                deposits
            
            
            **92,932**
            
            
            97,859Income
                taxes payable*[note
                14]*
            
            
            **44,877**
            
            
            129,702Current
                portion of long-term debt*[note
                10[a]]*
            
            
            **1,011**
            
            
            46,353Current
                portion of capital lease obligations*[note
                10[b]]*
            
            
            **168,430**
            
            
            157,531Current
                portion of due to shareholder*[note
                8]*
            
            
            **4,597**
            
            
            21,385**Total
                current liabilities**
            
            
            **1,246,267**
            
            
            1,305,846Long-term
                debt*[note 10[a]]*
            
            
            **3,748**
            
            
            4,368Capital
                lease obligations*[note
                10[b]]*
            
            
            **16,108**
            
            
            169,344Due
                to shareholder*[note 8]*
            
            
            **671,322**
            
            
            659,919Deferred
                tax liabilities*[note
                14]*
            
            
            **194,938**
            
            
            121,507**Total
                long-term liabilities**
            
            
            **886,116**
            
            
            955,138**Total
                liabilities**
            
            
            **2,132,383**
            
            
            2,260,984**Shareholders'
                equity**Capital
                stock*[note
                11]*Authorized100,000
                Class A preferred shares of $0.10 each899,400
                Class B preferred shares of $0.0167 each10,000,000
                common shares of $0.0167 eachIssued
                and outstanding899,400
                Class B preferred shares (2005 - 899,400)
            
            
            **15,010**
            
            
            15,0103,058,896
                common shares [2005 - 3,042,296]
            
            
            **50,953**
            
            
            50,676Contributed
                surplus
            
            
            **23,400,259**
            
            
            23,303,718Deficit
            
            
            **(16,633,410**
            **)**
            
            (15,144,357
            )Accumulated
                other comprehensive income*[note19]*
            
            
            **945,250**
            
            
            325,842**Total
                shareholders' equity**
            
            
            **7,778,062**
            
            
            8,550,889**9,910,445**
            
            
            10,811,873





*See
      accompanying notes*





On
      behalf
      of the Board:





Director  Director





32





**Polydex
      Pharmaceuticals Limited**





**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY**


[Expressed
      in United States dollars]








Years
      ended January 31, 2006, 2005 and 2004


**Accumulated****other**
            
            **Total****Preferred**
            
            **Common**
            
            **Contributed**
            
            
            
            **comprehensive**
            
            **shareholders'****shares**
            
            **shares**
            
            **surplus**
            
            **Deficit**
            
            **income
                (loss)**
            
            **equity**$
            
            $
            
            $
            
            $
            
            $
            
            $**Balance,
                January 31, 2003**
            
            
            15,010
            
            
            50,434
            
            
            23,224,128
            
            
            (16,278,269
            )
            
            (986,776
            )
            
            6,024,527Common
                share options issued
            
            
            —
            
            
            —
            
            
            12,370
            
            
            —
            
            
            —
            
            
            12,370Comprehensive
                income (loss):Net
                loss for the year
            
            
            —
            
            
            —
            
            
            —
            
            
            (5,999
            )
            
            —
            
            
            (5,999
            )Currency
                translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            876,433
            
            
            876,433**Balance,
                January 31, 2004**
            
            
            15,010
            
            
            50,434
            
            
            23,236,498
            
            
            (16,284,268
            )
            
            (110,343
            )
            
            6,907,331Common
                share options exercised
            
            
            —
            
            
            242
            
            
            53,008
            
            
            —
            
            
            —
            
            
            53,250Common
                share options issued
            
            
            —
            
            
            —
            
            
            14,212
            
            
            —
            
            
            —
            
            
            14,212Comprehensive
                income (loss):Net
                income for the year
            
            
            —
            
            
            —
            
            
            —
            
            
            1,139,911
            
            
            —
            
            
            1,139,911Unrealized
                loss
                on investments available
              for
                sale
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (15,760
            )
            
            (15,760
            )Currency
                translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            451,945
            
            
            451,945**Balance,
                January 31, 2005**
            
            
            15,010
            
            
            50,676
            
            
            23,303,718
            
            
            (15,144,357
            )
            
            325,842
            
            
            8,550,889Common
                share options exercised
            
            
            —
            
            
            **277**
            
            
            **82,517**
            
            
            **—**
            
            
            **—**
            
            
            **82,794**Common
                share options issued
            
            
            —
            
            
            —
            
            
            **14,024**
            
            
            **—**
            
            
            **—**
            
            
            **14,024**Comprehensive
                income (loss):Net
                income (loss) for the year
            
            
            —
            
            
            —
            
            
            —
            
            
            (**1,489,053**
            **)**
            
            **—**
            
            
            **(1,489,053**
            **)**Unrealized
                  loss
                  on investmentsavailable
                for
                  sale
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            **(12,349**
            **)**
            
            **(12,349**
            **)**Currency
                translation adjustment
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            **631,757**
            
            
            **631,757****Balance,
                January 31, 2006**
            
            
            **15,010**
            
            
            **50,953**
            
            
            **23,400,259**
            
            
            **(16,633,410**
            **)**
            
            **945,250**
            
            
            **7,778,062**




*See
      accompanying notes*





33





**Polydex
      Pharmaceuticals Limited**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


[Expressed
      in United States dollars]








Years
      ended January 31


**2006**
            
            **2005**
            
            **2004**$
            
            $
            
            $**Sales**
            
            
            **5,265,209**
            
            
            6,372,359
            
            
            14,092,189Cost
                of goods sold
            
            
            **4,836,024**
            
            
            4,855,941
            
            
            11,306,324**Gross
                profit**
            
            
            **429,185**
            
            
            1,516,418
            
            
            2,785,865**Expenses**General
                and administrative*[note
                11[b]]*
            
            
            **1,421,159**
            
            
            1,465,849
            
            
            2,334,642Selling
                and promotion
            
            
            **129,576**
            
            
            128,731
            
            
            158,846Research
                and development, net*[note
                13]*
            
            
            **205,801**
            
            
            114,742
            
            
            60,951Interest,
                net*[note
                8]*
            
            
            **81,509**
            
            
            91,210
            
            
            133,382Depreciation
            
            
            **61,160**
            
            
            36,365
            
            
            38,267Amortization
            
            
            —
            
            
            8,518
            
            
            15,787Foreign
                exchange (gain) loss
            
            
            **(18,139**
            **)**
            
            (46,172
            )
            
            447,602Gain
                  on sale of veterinary productsassets
            
            
            —
            
            
            (1,859,471
            )
            
            —Loss
                on disposal of assets
            
            
            **4,581**
            
            
            —
            
            
            —Interest
                and other income
            
            
            (**148,166**
            **)**
            
            (130,131
            )
            
            (7,645
            )Total
                expenses (income)
            
            
            **1,737,481**
            
            
            (190,359
            )
            
            3,181,832Income
                (loss) before income taxes
            
            
            **(1,308,296**
            **)**
            
            1,706,777
            
            
            (395,967
            )Provision
                for (recovery of) income taxes*[note
                14]*
            
            
            **180,757**
            
            
            566,866
            
            
            (389,968
            )**Net
                income (loss) for the year**
            
            
            **(1,489,053**
            **)**
            
            1,139,911
            
            
            (5,999
            )Unrealized
                loss on investments available for sale
            
            
            **(12,349**
            **)**
            
            (15,760
            )
            
            —Currency
                translation adjustment
            
            
            **631,757**
            
            
            451,945
            
            
            876,433**Comprehensive
                income (loss) for the year**
            
            
            **(869,645**
            **)**
            
            1,576,096
            
            
            870,434**Per
                share information**Earnings
                (loss) per common shareBasic
            
            
            (**0.49**
            **)**
            
            0.38
            
            
            —Diluted
            
            
            (**0.49**
            **)**
            
            0.37
            
            
            —





*See
      accompanying notes*





34





**Polydex
      Pharmaceuticals Limited**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


[Expressed
      in United States dollars]








Years
      ended January 31


**2006**
              
              **2005**
              
              **2004**$
              
              $
              
              $**OPERATING
                  ACTIVITIES**Net
                  income (loss) for the year
              
              
              (**1,489,053**
              **)**
              
              1,139,911
              
              
              (5,999
              )Add
                  (deduct) items not affecting cashDepreciation
                  and amortization
              
              
              **543,023**
              
              
              513,095
              
              
              617,685Imputed
                  interest on long-term debt
              
              
              **1,363**
              
              
              14,648
              
              
              25,760Deferred
                  income taxes
              
              
              **121,478**
              
              
              417,003
              
              
              (414,594
              )Amortization
                  of premium on investments available for sale
              
              
              **28,005**
              
              
              —
              
              
              —Loss
                  on disposal of equipment
              
              
              **4,581**
              
              
              3,586
              
              
              —Gain
                  on sale of veterinary products business*[note
                  12]*
              
              
              **—**
              
              
              (1,859,471
              )
              
              —License
                  fee charged to due from shareholder
              
              
              **73,740**
              
              
              81,179
              
              
              60,239Provision
                    for due from Sparhawk Laboratories, Inc.[note
                    12]
              
              
              **—**
              
              
              —
              
              
              —Options
                  issued in exchange for services*****[note
                  11[b]]*
              
              
              **14,024**
              
              
              14,212
              
              
              12,370Net
                  change in non-cash working capital balances related to operations*[note
                  15]*
              
              
              **277,654**
              
              
              (634,514
              )
              
              (74,036
              )**Cash
                  provided by (used in) operating activities**
              
              
              **(425,185**
              **)**
              
              (310,351
              )
              
              221,425**INVESTING
                  ACTIVITIES**Additions
                  to property, plant andequipment
                  and patents
              
              
              **(418,246**
              **)**
              
              (159,554
              )
              
              (183,124
              )Proceeds
                  from sale of veterinary productsbusiness*[note
                  12]*
              
              
              **—**
              
              
              4,599,218
              
              
              —Decrease
                  in due from shareholder
              
              
              **77,718**
              
              
              65,960
              
              
              129,908Purchase
                  of investments available for sale
              
              
              **(567,942**
              **)**
              
              (1,841,854
              )
              
              —Acquisition
                  of minority interest
              
              
              **—**
              
              
              **—**
              
              
              (5,860
              )Proceeds
                  from sale of equipment
              
              
              **3,748**
              
              
              5,148
              
              
              —**Cash
                  provided by (used in) investing activities**
              
              
              **(904,722**
              **)**
              
              2,668,918
              
              
              (59,076
              )**FINANCING
                  ACTIVITIES**Repayment
                  of long-term debt
              
              
              **(47,745**
              **)**
              
              (296,035
              )
              
              (453,805
              )Proceeds
                  from long-term debt
              
              
              **—**
              
              
              5,383
              
              
              —Repayment
                  of capital lease obligations
              
              
              **(162,873**
              **)**
              
              (167,531
              )
              
              (126,703
              )Increase
                  (decrease) in due to shareholder
              
              
              **(5,385**
              **)**
              
              (1,930
              )
              
              1,009Increase
                  (decrease) in bank indebtedness
              
              
              **(24,170**
              **)**
              
              (147,140
              )
              
              165,609Exercise
                  of common share options
              
              
              **82,794**
              
              
              53,250
              
              
              —**Cash
                  used in financing activities**
              
              
              **(157,379**
              **)**
              
              (554,003
              )
              
              (413,890
              )Effect
                  of exchange rate changes on cash
              
              
              **57,686**
              
              
              224,959
              
              
              342,321**Net
                  increase (decrease) in cash and cash equivalents****during
                  the year**
              
              
              **(1,429,600**
              **)**
              
              2,029,523
              
              
              90,780Cash
                  and cash equivalents, beginning of year
              
              
              **2,401,051**
              
              
              371,528
              
              
              280,748**Cash
                  and cash equivalents, end of year**
              
              
              **971,451**
              
              
              2,401,051
              
              
              371,528Cash
                  and cash equivalents is comprised of the followingCash
              
              
              **236,422**
              
              
              129,818
              
              
              371,528Short-term
                  deposits
              
              
              **735,029**
              
              
              2,271,233
              
              
              —**971,451**
              
              
              2,401,051
              
              
              371,528





*See
      accompanying notes*




35
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
      31, 2006




**1.
      GENERAL**





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





**2.
      SIGNIFICANT ACCOUNTING POLICIES**





**Basis
      of consolidation**





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





**Use
      of estimates**





The
      preparation of financial statements in conformity with United States generally
      accepted accounting principles requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the consolidated
      financial statements and the reported amounts of revenue and expenses during
      the
      reporting period. Actual results could differ from those estimates.





**Inventories**





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





**Investments
      available for sale**





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





36
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
        31, 2006




**Property,
      plant and equipment and patents and intangible assets**





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





Buildings
            15
                yearsMachinery
                and equipment
            3
                to 10 years




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





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





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





**Revenue
      recognition**





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





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





No
      testing and approval is required for finished dosage product because of its
      nature. Returns of finished dosage product are rare and generally are not
      accepted.





**Comprehensive
      income**





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





**Shipping
      and handling costs**





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





37
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
        31, 2006


**Research
      and development**





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





**Foreign
      currency translation**





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





**Derivative
      financial instruments**





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





**Income
      taxes**





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




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





**Stock
      options**





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





38
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
        31, 2006


**Earnings
      (loss) per common share**





Basic
      earnings (loss) per common share is computed using the weighted average number
      of shares outstanding of 3,052,296 for the year ended January 31, 2006 [2005
      -
      3,037,463; 2004 - 3,027,796]. Diluted earnings (loss) per common share is
      computed using the weighted average number of shares outstanding adjusted for
      the incremental shares, using the treasury stock method, attributed to
      outstanding options to purchase common stock. Incremental shares of nil in
      2006
      [2005 - 26,265; 2004 - nil], were used in the calculation of diluted earnings
      (loss) per common share. Options to purchase nil, 18,250 and 427,935 common
      shares in 2006, 2005 and 2004, respectively, were not included in the
      computation of diluted earnings (loss) per common share because their effect
      was
      anti-dilutive.





**3.
      CASH AND CASH EQUIVALENTS**





Cash
      and
      cash equivalents consist of the following:





**2006**
            
            **2005**$
            
            $Cash
            
            
            **236,422**
            
            
            129,818Short-term
                deposits
            
            
            **735,029**
            
            
            2,271,233**971,451**
            
            
            2,401,051





Short-term
      deposits in the amount of Cdn. $833,722 have maturities of less than three
      months at the date of purchase. Interest rates on the short-term deposits range
      from 2.11% to 3.15%.





**4.
      INVENTORIES**





Inventories
      consist of the following:





**2006**
            
            **2005**$
            
            $Finished
                goods
            
            
            **1,108,626**
            
            
            1,187,158Work-in-process
            
            
            **285,422**
            
            
            123,730Raw
                materials
            
            
            **155,496**
            
            
            206,005**1,549,544**
            
            
            1,516,893




39
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
        31, 2006


**5.
      PROPERTY, PLANT AND EQUIPMENT**





Property,
      plant and equipment consist of the following:





**2006**
            
            **2005****Net**
            
            
            
            
            
            **Net****Accumulated**
            
            **book**
            
            
            
            **Accumulated**
            
            **book****Cost**
            
            **depreciation**
            
            **value**
            
            **Cost**
            
            **depreciation**
            
            **value**$
            
            $
            
            $
            
            $
            
            $
            
            $Land
                and buildings
            
            
            **1,788,720**
            
            
            **762,183**
            
            
            **1,026,537**
            
            
            1,494,166
            
            
            614,974
            
            
            879,192Machinery
                and equipment
            
            
            **8,498,352**
            
            
            **6,244,165**
            
            
            **2,254,187**
            
            
            7,564,545
            
            
            5,319,552
            
            
            2,244,993**10,287,072**
            
            
            **7,006,348**
            
            
            **3,280,724**
            
            
            9,058,711
            
            
            5,934,526
            
            
            3,124,185





Included
      in machinery and equipment are assets under capital lease with a total cost
      of
      $1,061,909 [2005 - $974,472] and accumulated depreciation of $593,406 [2005
      -
      $444,550]. Depreciation of assets under capital lease is included in cost of
      goods sold. Depreciation of $481,863 was charged to cost of sales in fiscal
      2006
      (2005- $468,212). Assets not available for use amounted to
      $346,856.





**6.
      PATENTS AND INTANGIBLE ASSETS**





Patents
      and intangible assets consist of the following:





**2006**
            
            **2005**$
            
            $Cost
            
            
            **80,341**
            
            
            80,341Less
                accumulated amortization
            
            
            **18,750**
            
            
            11,382**61,591**
            
            
            68,959





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





40
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
        31, 2006


**7.
      INVESTMENTS AVAILABLE FOR SALE**





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


**2006**
              
              **2005**$
              
              $Debt
                  security in the amount of Cdn. $920,649 from the Bank of Nova Scotia
                  yielding 3.35%, maturing
                on
                  June 7, 2006
              
              
              **801,752**Debt
                  security in the amount of Cdn. $700,000 from the Province of Alberta
                  bearing interest at 7.5%
                and
                  maturing on December 1, 2005
              
              
              —
              
              
              588,375Debt
                  security in the amount of Cdn. $718,000 from GE Capital Canada
                  bearing
                  interest at 4.35% and
                maturing
                  on February 6, 2006
              
              
              **639,292**
              
              
              595,335Debt
                  security in the amount of Cdn. $750,000 from General Motors Acceptance
                  Corp. maturing on
                June
                  7, 2007; floating rate interest is paid quarterly
              
              
              **623,448**
              
              
              599,30542,752
                  units of DFA Fixed Income Fund
              
              
              **349,454**
              
              
              —15,000
                  units of Barclays Top 100 Equal Weighted Income Fund
              
              
              **144,601**
              
              
              126,29010,000
                  units of Citadel Stables Series 1 Income fund
              
              
              **79,894**
              
              
              —**2,638,441**
              
              
              1,909,305







As
      at
      January 31, 2006, accumulated other comprehensive income includes unrealized
      losses on debt securities available for sale of $18,918 (2005 - $21,802) and
      unrealized losses on income fund trust units of $11,752 (2005-$5,438 of
      unrealized gains).





**8.
      RELATED PARTY TRANSACTIONS**





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





**2006**
            
            **2005**$
            
            $Amounts
                due from estate of former shareholder*[i]*
            
            
            **488,711**
            
            
            643,867Amounts
                due to shareholder*[ii]*
            
            
            **(675,919**
            **)**
            
            (681,304
            )





[i]
            Amounts
                due from estate of former shareholder [the “Estate”] bear interest at the
                United States banks prime lending rate plus 1.5% [2006 - 8.76%; 2005
                -
                5.75%], except for an amount of $457,599 [2005 - $535,037] which
                is
                non-interest bearing. Interest income on this loan is recognized
                when
                realized. These amounts have no fixed terms of repayment. The Estate
                has
                pledged 307,909 shares of the Company and has pledged future license
                fee
                payments from the Iron Dextran process license agreement*[note
                13]*as
                collateral for this loan. During 2006, $73,471 [2005 - $78,168; 2004
                -
                $60,239] of license fee payments were made. The Company will continue
                to
                hold the pledged assets as collateral until the loan is repaid. The
                Company had a commitment to pay a death benefit of $110,000 to the
                Estate.
                At January 31, 2006, a balance of $51,816 is still to be paid to
                the
                Estate.








41
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
        31, 2006




[ii]
            Amounts
                due to shareholder bear interest at the United States banks prime
                lending
                rate plus 1.5% [2006 - 8.76%; 2005 - 5.75%]. The Company is required
                to
                make monthly payments, inclusive of accrued interest, of $5,000.
                Based on
                the current rate of interest, the principal repayment on this loan
                for
                fiscal 2007 would be approximately $5,000. This loan may not be
                called.





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





**2006**
            
            **2005**
            
            **2004**$
            
            $
            
            $Interest
                expense
            
            
            **53,113**
            
            
            37,569
            
            
            42,006





**9.
      BANK INDEBTEDNESS**





The
      Company has a Canadian operating line of credit of Cdn. $1,250,000 [U.S.
      $1,097,000] [2005 - Cdn. $1,250,000; U.S. $1,007,000], none of which
      was utilized at January 31, 2006 [2005 - Cdn. $30,000; U.S. $24,000]. The
      Canadian line of credit bears interest at the Canadian banks' prime lending
      rate
      plus 0.50% [2006 - 5.25%; 2005 - 5%]. Subsequent to the year end, an additional
      credit facility of Cdn $500,000 [U.S. $439,000] was obtained. Bank indebtedness
      is collateralized by a general security agreement over the Company's assets
      and
      a collateral mortgage of $500,000 on the Dextran Products Limited ["Dextran
      Products"] building.





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





**10.
      LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS**





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


**2006**
              
              **2005**$
              
              $Note
                    payable in blended quarterly payments of Cdn. $419 [U.S. $368],
                    bearing
                    interest at a fixed rate of 10%,maturing
                    September 10, 2010, with the vendor holding a security interest
                    in the
                    equipment
              
              
              **4,759**
              
              
              5,204Note
                  payable in monthly payments of $5,860 maturing September 19, 2005.
                  The
                  total amount of repayments were presented at their net present
                  value using
                  a discount rate of 9%. The payments were non-interest bearing and
                  are
                  unsecured
              
              
              **—**
              
              
              45,517**4,759**
              
              
              50,721Less
                  current portion
              
              
              **1,011**
              
              
              46,353**3,748**
              
              
              4,368




42
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
        31, 2006


Repayments
      on the long-term debt are as follows:





$2007
            
            
            1,0112008
            
            
            1,1222009
            
            
            1,2452010
            
            
            1,381Total
                long-term debt repayments
            
            
            4,759





[b] Capital
      lease obligations consist of the following:


**2006**
              
              **2005**$
              
              $Obligation
                  [Cdn. $154,220] under a capital lease, repayable in monthly instalments,
                  bearing interest at 9% and maturing November 2006. The Company
                  has an
                  option to purchase the asset for $97,892 [Cdn. $111,500] or at
                  fair market
                  value at the end of the lease term
              
              
              **135,399**
              
              
              248,714Obligation
                  [Cdn. $32,671] under a capital lease, repayable in monthly instalments,
                  bearing interest at 7.59% and maturing November 2006. The Company
                  has an
                  option to purchase the asset for $1 at the end of the lease
                  term
              
              
              **28,684**
              
              
              55,795Obligation
                  [Cdn. $23,298] under a capital lease, repayable in quarterly instalments,
                  bearing interest at 10.43% and maturing December 2009. The Company
                  has an
                  option to purchase the asset for fair value at the end of the lease
                  term
              
              
              **20,455**
              
              
              22,366**184,538**
              
              
              326,875Less
                  current portion
              
              
              **168,430**
              
              
              157,531**16,108**
              
              
              169,344





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





43
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
        31, 2006


$2007
            
            
            177,6632008
            
            
            6,3312009
            
            
            6,3312010
            
            
            6,331Total
                minimum lease payments
            
            
            196,656Less
                amount representing imputed interest
            
            
            12,118184,538





**11.
      CAPITAL STOCK**





**[a]** **Share
      capital issued and outstanding**





**[i]**
            **Class
                A preferred shares**





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





**[ii]**
            **Class
                B preferred shares**





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





**[iii]**
            **Common
                shares**





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





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





**[b]  Share
      option
      plan**





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





All
      options granted have a term of five years and vest immediately. At
      January 31, 2006, the Company has 42,175 options outstanding at exercise
      prices ranging from $2.50 to $7.72 and a weighted average exercise price of
      $4.24. The options, which are immediately exercisable and expire on dates
      between January 31, 2007 and January 31, 2011, entitle the holder of an option
      to acquire one common share of the Company.





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





44
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
        31, 2006





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





During
      the year ended January 31, 2004, 3,885 common share options were issued to
      the
      independent directors of the Company. These options were valued at $12,370
      and
      were charged to general and administrative expense, in accordance with SFAS
      123.
      The fair value for these options was estimated at the date of grant using the
      Black-Scholes option pricing model with the following assumptions: risk-free
      interest rate of 3.12%; dividend yield of nil; volatility factor of the expected
      market price of the Company's common stock of 0.701, and an expected life of
      the
      options of five years.





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





**Weighted
                average****Share
                options**
            
            **exercise
                price per share****2006**
            
            **2005**
            
            **2004**
            
            **2006**
            
            **2005**
            
            **2004**#
            
            #
            
            #
            
            $
            
            $
            
            $**Options
                  outstanding,beginning
                  of year**
            
            
            **86,300**
            
            
            427,935
            
            
            431,550
            
            
            **4.75**
            
            
            3.92
            
            
            3.88Granted
            
            
            **3,975**
            
            
            4,365
            
            
            3,885
            
            
            **7.52**
            
            
            6.86
            
            
            7.72Exercised
            
            
            **(16,600**
            **)**
            
            (14,500
            )
            
            —
            
            
            **4.99**
            
            
            3.67
            
            
            —Expired
            
            
            **(31,500**
            **)**
            
            (331,500
            )
            
            (7,500
            )
            
            **5.66**
            
            
            3.75
            
            
            3.50**Options
                  outstanding,end
                  of year**
            
            
            **42,175**
            
            
            86,300
            
            
            427,935
            
            
            **4.24**
            
            
            4.75
            
            
            3.92**Weighted
                    average fair**
                  **value
                    of options granted**
                  **during
                    the year**
            
            
            
            
            
            
            
            
            
            
            **$**
            **3.53**
            
            $
            3.26
            
            $
            3.18The
                following table summarizes information relating to the options outstanding
                at January 31, 2006:**Exercise**
              **price**
            
            
            **Number**
                **outstanding**
            
            
            
            
            
            
            
            
            
            
            
            **Weighted
                    average**
                **remaining**
              **contractual
                life**$
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            [months]**2.50**
            
            
            **12,000**
            
            
            
            
            
            
            
            
            
            
            
            **24****2.75**
            
            
            **10,950**
            
            
            
            
            
            
            
            
            
            
            
            **12****3.00**
            
            
            **3,000**
            
            
            
            
            
            
            
            
            
            
            
            **4****5.00**
            
            
            **4,000**
            
            
            
            
            
            
            
            
            
            
            
            **4****6.86**
            
            
            **4,365**
            
            
            
            
            
            
            
            
            
            
            
            **48****7.52**
            
            
            **3,975**
            
            
            
            
            
            
            
            
            
            
            
            **60****7.72**
            
            
            **3,885**
            
            
            
            
            
            
            
            
            
            
            
            **48****42,175**
            
            
            
            
            
            
            
            
            
            
            
            **26**




45
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
        31, 2006


**12.
      VETERINARY LABORATORIES, INC.**





**Sparhawk
      Laboratories, Inc.**




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





On
      January 13, 2004, the Company entered into an Asset Purchase Agreement with
      Sparhawk. Pursuant to this Asset Purchase Agreement, the Company agreed to
      sell
      the finished product veterinary pharmaceutical business, including substantially
      all of the assets of Vet Labs, to Sparhawk for $5,500,000 in cash. Effective
      March 4, 2004, this sale was completed. Simultaneously, on March 4, 2004,
      Chemdex, Inc. ["Chemdex"], a wholly-owned subsidiary of the Company, advanced
      $350,000 to Sparhawk in exchange for a promissory note bearing interest at
      13%
      per annum and a warrant to purchase 4% of the equity of Sparhawk for no
      additional consideration. The promissory note is due in full on March 4, 2009.
      Interest is payable annually on the anniversary date, but can be deferred and
      added to the principal balance of the promissory note each year at Sparhawk's
      discretion. At January 31, 2006 interest of $41,511 (2005 - $41,511) was accrued
      and reported as interest receivable on the balance sheet. On March 10, 2006,
      Sparhawk paid interest on the promissory note of $45,998 in cash. In fiscal
      year
      2007 and subsequent fiscal years, should Sparhawk pay the interest due
      subsequent to year end, the amount of interest relating to the period January
      31
      will be accrued as interest receivable at the fiscal year end. If interest
      is
      not paid on the anniversary date, no interest will be recorded and the interest
      receivable amount will be fully provided for. The warrant expires at the earlier
      of payment in full of the promissory note or 10 years from date of issue. The
      warrant becomes exercisable the day after the fifth anniversary from the date
      of
      issue. Pursuant to a definitive supply agreement [the "Supply Agreement"]
      entered into on March 4, 2004, Chemdex agreed to supply ferric hydroxide and
      hydrogenated dextran solution to Sparhawk on an exclusive basis in the United
      States for 10 years. Chemdex also granted to Sparhawk an exclusive license
      to
      use the drug master file to manufacture 10% bulk Iron Dextran for veterinary
      use, and the use of certain equipment during the 10-year period of the Supply
      Agreement. Pursuant to definitive agreements, the Company made customary
      representations, warranties and indemnities and agreed to a full release of
      all
      claims against Sparhawk arising from the Joint Venture litigation. Similarly,
      Sparhawk agreed to a full release of all claims against the Company arising
      from
      the Joint Venture litigation.





The
      sale
      resulted in a gain of $2,209,471, of which $1,859,471 was recognized in the
      consolidated statements of operations and $350,000 was deferred. The deferred
      gain of $350,000 relates to the promissory note receivable from Sparhawk as
      Sparhawk is thinly capitalized and highly leveraged. The Company will monitor
      the financial position of Sparhawk and will recognize this deferred gain at
      such
      time as Sparhawk's cash flows from operations are sufficient to fund debt
      service on a full accrual basis.





As
      described in note 10[a], long-term debt of the Company included an amount due
      under a share value guarantee which arose upon the acquisition of Vet Labs
      in
      1992. This share value guarantee was collateralized by the assets of Vet Labs
      including the land and building. To release the charge against the Vet Labs
      assets, this share value guarantee had to be paid in full. This payment of
      $225,353 was made on March 4, 2004 from the sale proceeds.





46
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
        31, 2006


The
      Joint
      Venture operations comprised substantially all of the operations of the Chemdex
      segment *[note
      16]* .
      Legal
      and receiver costs relating to the Joint Venture were included in general and
      administrative expense on the consolidated statements of operations.





**13.
      LICENSE AGREEMENTS AND RESEARCH AND DEVELOPMENT**





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





**2006**
            
            **2005**
            
            **2004**$
            
            $
            
            $Research
                and development expenditures
            
            
            **215,482**
            
            
            127,847
            
            
            73,635Investment
                tax credits
            
            
            **(9,681**
            **)**
            
            (13,105
            )
            
            (12,684
            )**Research
                and development expense**
            
            
            **205,801**
            
            
            114,742
            
            
            60,951





**Iron
      Dextran process**





The
      Company has an agreement with the Estate which grants the Company the exclusive
      worldwide license to use a certain process for producing Iron Dextran. This
      license agreement expires in 2014. The Company pays a license fee based on
      production volumes. The total license fee incurred during the year was $73,471
      [2005 - $78,168; 2004 - $60,239]. These payments are applied to the
      balance owing by the Estate *[note
      8[i]]* .





**Cellulose
      Sulphate BV Clinical Evaluation Program**





During
      September 2004, the Company entered into an agreement with a research
      organization to conduct a pilot clinical study on the use of cellulose sulphate
      for the treatment of bacterial vaginosis. Payments of $43,112 were made to
      the
      research organization and the principal investigator upon execution of the
      agreement. During the year ended January 31, 2006, the Company made payments
      of
      $26,000 upon patient enrolment, and will make a final payment of $38,668 upon
      completion of the clinical study, which is expected to occur during the fiscal
      year 2007. In March of 2006, the Company entered into an agreement for the
      monitoring of the clinical trial, and is expecting to make payments during
      the
      fiscal year 2007 in the amount of $31,986.





47
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
        31, 2006


**14.
      INCOME TAXES**




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





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


**2006**
            
            **2005**
            
            **2004**$
            
            $
            
            $Bahamas
            
            
            **(185,653**
            **)**
            
            (642,870
            )
            
            (391,641
            )Canada
            
            
            **(1,088,398**
            **)**
            
            250,863
            
            
            61,980United
                States
            
            
            **(34,245**
            **)**
            
            2,098,784
            
            
            (66,306
            )**(1,308,296**
            **)**
            
            1,706,777
            
            
            (395,967
            )





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





**2006**
            
            **2005**
            
            **2004**$
            
            $
            
            $Foreign
                witholding taxes and other on Bahamian income
            
            
            —
            
            
            123,000
            
            
            —Provision
                  for (recovery of) income taxes based onCanadian
                  statutory income tax rates
            
            
            **(370,055**
            **)**
            
            92,819
            
            
            22,933Foreign
                withholding taxes
            
            
            **56,601**
            
            
            —
            
            
            —Increase
                (decrease) in tax reserve
            
            
            —
            
            
            (232,739
            )
            
            —Increase
                (decrease) in valuation allowance
            
            
            **651,107**
            
            
            (36,009
            )
            
            53,900Tax
                and exchange rate changes on deferred tax items
            
            
            **(13,343**
            **)**
            
            4,654
            
            
            (20,203
            )Items
                not deductible for tax
            
            
            **(19,603**
            **)**
            
            (21,859
            )
            
            53,402**304,707**
            
            
            (193,134
            )
            
            110,032Provision
                for (recovery of) income taxes based onUnited
                States income tax rates
            
            
            **(12,671**
            **)**
            
            776,550
            
            
            (24,533
            )Tax
                recovery on Joint Venture partner'sshare
                of income
            
            
            —
            
            
            (160,697
            )
            
            (132,282
            )Tax
                on non-deductible items
            
            
            —
            
            
            (23,511
            )
            
            —Increase
                (decrease) in valuation allowance
            
            
            **(111,279**
            **)**
            
            44,658
            
            
            (343,185
            )**(123,950**
            **)**
            
            637,000
            
            
            (500,000
            )**Provision
                for (recovery of) income taxes**
            
            
            **180,757**
            
            
            566,866
            
            
            (389,968
            )




48
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
        31, 2006


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





**2006**
            
            **2005**
            
            **2004**$
            
            $
            
            $Canadian
                deferred tax recovery
            
            
            **(183,285**
            **)**
            
            (280,453
            )
            
            (38,083
            )Canadian
                deferred tax expense
            
            
            **304,763**
            
            
            197,456
            
            
            128,440Canadian
                current tax expense
            
            
            **183,229**
            
            
            12,863
            
            
            19,675United
                States deferred tax recovery
            
            
            **—**
            
            
            **—**
            
            
            (500,000
            )United
                States deferred tax expense
            
            
            **—**
            
            
            500,000
            
            
            —United
                States current tax expense
            
            
            **—**
            
            
            137,000
            
            
            —United
                States current tax recovery
            
            
            **(123,950**
            **)**
            
            —
            
            
            —**180,757**
            
            
            566,866
            
            
            (389,968
            )





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





**2006**
            
            **2005**
            
            **2004**$
            
            $
            
            $**Deferred
                tax assets**CanadianNon-capital
                losses
            
            
            **1,054,054**
            
            
            **—**
            
            
            **—**Unclaimed
                research and development expenses
            
            
            **295,518**
            
            
            255,485
            
            
            307,180Net
                capital losses*[note
                14[c]]*
            
            
            **188,353**
            
            
            140,173
            
            
            102,800Other
                items
            
            
            **27,733**
            
            
            84,566
            
            
            90,200United
                StatesNet
                operating loss carryforwards
            
            
            **84,371**
            
            
            **—**
            
            
            580,000Unpaid
                intercompany interest
            
            
            —
            
            
            149,706
            
            
            150,000Allowance
                on Sparhawk note*[note
                12]*
            
            
            **84,206**
            
            
            84,206
            
            
            —**1,734,235**
            
            
            714,136
            
            
            1,230,180Less
                valuation allowance
            
            
            **1,734,235**
            
            
            421,160
            
            
            627,000**—**
            
            
            —
            
            
            292,976
            
            
            603,180**Deferred
                tax liabilities**Excess
                  of carrying value over tax value ofdepreciable
                  assets
            
            
            **(185,353**
            **)**
            
            (214,560
            )
            
            (249,000
            )Investment
                tax credits and other items
            
            
            **(9,585**
            **)**
            
            (143,715
            )
            
            (1,234
            )**Net
                deferred tax assets (liabilities)**
            
            
            **(194,938**
            **)**
            
            (65,299
            )
            
            352,946





[c]
            The
                Canadian subsidiaries have non-capital loss carryforwards available
                to
                reduce future years’ income for tax purposes totaling approximately
                $2,943,000 and $1,888,359 for federal and provincial purposes,
                respectively. These non-capital losses expire from 2007 to 2016.





The
      Canadian subsidiaries also have deductions available to reduce future years'
      income for tax purposes on account of net temporary differences resulting from
      expense items reported for income tax purposes in different periods than for
      financial statement purposes totalling approximately $1,088,000 and $566,000
      for
      federal and provincial purposes, respectively. Certain Canadian subsidiaries
      also have net capital losses available for carryforward of approximately
      $546,000 available to offset future taxable capital gains. These potential
      deductions and net capital losses have an indefinite carryforward
      period.





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




**15.
      CONSOLIDATED STATEMENTS OF CASH FLOWS**





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





**2006**
            
            **2005**
            
            **2004**$
            
            $
            
            $**Decrease
                (increase) in current assets**Trade
                accounts receivable
            
            
            **246,607**
            
            
            (371,170
            )
            
            402,848Interest
                receivable
            
            
            —
            
            
            (41,511
            )
            
            —Inventories
            
            
            **98,154**
            
            
            (196,214
            )
            
            (270,190
            )Prepaid
                expenses and other current assets
            
            
            **(7,926**
            **)**
            
            (69,916
            )
            
            (45,350
            )**336,835**
            
            
            (678,811
            )
            
            87,308**Increase
                (decrease) in current liabilities**Accounts
                payable
            
            
            **66,247**
            
            
            (83,326
            )
            
            (171,739
            )Accrued
                liabilities
            
            
            **(27,892**
            **)**
            
            12,274
            
            
            66,878Customer
                deposits
            
            
            **(13,006**
            **)**
            
            (13,190
            )
            
            (20,660
            )Income
                taxes payable
            
            
            **(84,530**
            **)**
            
            128,539
            
            
            (35,823
            )**277,654**
            
            
            (634,514
            )
            
            (74,036
            )





Cash
      paid
      during the year for interest was $27,033 [2005 - $38,993; 2004 - $65,616].
      Cash
      paid during the year for income taxes was $3,891 [2005 - $6,433; 2004 -
      $44,024].





There
      were no capital equipment acquisitions under capital leases for the year ended
      January 31, 2006. For the year ended January 31, 2005, capital equipment
      acquired under capital lease of $23,137 [2004 - $78,978] was treated as non-cash
      additions. During the year ended January 31, 2004, assets of $134,602, acquired
      through the acquisition of minority interest, less cash paid on date of closing
      of $5,860 were treated as non-cash additions.





49
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
        31, 2006


**16.
      SEGMENTED INFORMATION**





All
      of
      the operations of the Company are carried on through Dextran Products in Canada
      and through Chemdex in the United States. The operations of Chemdex represent
      the veterinary products business and the operations were carried out through
      its
      wholly-owned subsidiary, Vet Labs. Vet Labs carried on its business through
      a
      Joint Venture with Sparhawk until March 4, 2004 when the majority of this
      business was sold to Sparhawk *[note
      12]* .
      Each of
      Dextran Products and Chemdex operates as a strategic business unit offering
      different products. Each subsidiary comprises a reportable segment as
      follows:





·
            Dextran
                Products - manufactures and sells bulk quantities of Dextran and
                several
                of its derivatives to large pharmaceutical companies throughout the
                world.·
            Chemdex
                - manufactured and sold veterinary pharmaceutical products and specialty
                chemicals in the United States until March 4, 2004. The primary customers
                were distributors and private labelers, who in turn sold to the end
                user
                of these products. Since March 4, 2004, the operations of Chemdex
                have
                been limited to the sale of bulk iron dextran to
                Sparhawk.





The
      Company evaluates segment performance based primarily on operating income,
      excluding unusual items. The Company accounts for intersegment sales as if
      the
      sales were to third parties at current market prices. The accounting policies
      of
      the segments are the same as those described in the significant accounting
      policies.





[a]
            The
                following is condensed segment financial information as at and for
                the
                years ended January 31:





**2006****Dextran**
            
            **Chemdex**
            
            **Total**$
            
            $
            
            $Gross
                sales
            
            
            **5,236,048**
            
            
            **534,222**
            
            
            **5,770,270**Intercompany
                sales
            
            
            **505,061**
            
            
            **—**
            
            
            **505,061**Interest
                expense
            
            
            **27,033**
            
            
            **1,363**
            
            
            **28,396**Depreciation
                and amortization
            
            
            **535,655**
            
            
            **7,368**
            
            
            **543,023**Income
                (loss) before income taxes
            
            
            **(463,989**
            **)**
            
            **(73,158**
            **)**
            
            **(537,147**
            **)**Interest
                income
            
            
            **102,667**
            
            
            **45,499**
            
            
            **148,166**Segment
                assets
            
            
            **9,179,697**
            
            
            **234,866**
            
            
            **9,414,563**Capital
                expenditures
            
            
            **418,246**
            
            
            **—**
            
            
            **418,246****2005****Dextran**
            
            
            **Chemdex**
            
            
            **Total**$
            
            
            $
            
            
            $Gross
                sales
            
            
            5,362,948
            
            
            1,456,146
            
            
            6,819,094Intercompany
                sales
            
            
            446,735
            
            
            —
            
            
            446,735Interest
                expense
            
            
            38,993
            
            
            6,975
            
            
            45,968Depreciation
                and amortization
            
            
            496,072
            
            
            8,505
            
            
            504,577Income
                (loss) before income taxes
            
            
            256,169
            
            
            2,093,478
            
            
            2,349,647Interest
                income
            
            
            91,563
            
            
            41,554
            
            
            133,117Segment
                assets
            
            
            9,933,254
            
            
            233,539
            
            
            10,166,793Capital
                expenditures
            
            
            182,691
            
            
            —
            
            
            182,691




50
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
        31, 2006


**2004****Dextran**
            
            **Chemdex**
            
            **Total**$
            
            $
            
            $Gross
                sales
            
            
            5,142,881
            
            
            9,349,670
            
            
            14,492,551Intercompany
                sales
            
            
            400,362
            
            
            —
            
            
            400,362Interest
                expense
            
            
            48,294
            
            
            20,883
            
            
            69,177Depreciation
                and amortization
            
            
            459,054
            
            
            142,844
            
            
            601,898Income
                (loss) before income taxes
            
            
            58,703
            
            
            (63,029
            )
            
            (4,326
            )Interest
                income
            
            
            445
            
            
            —
            
            
            445Segment
                assets
            
            
            5,045,899
            
            
            4,281,084
            
            
            9,326,983Capital
                expenditures
            
            
            218,859
            
            
            177,845
            
            
            396,704





[b]
            The
                following reconciles segment information presented above to the
                consolidated financial statements as at and for the years ended
                January 31:





**2006**
            
            **2005**
            
            **2004**$
            
            $
            
            $**Gross
                sales**Gross
                sales from segments
            
            
            **5,770,270**
            
            
            **6,819,094**
            
            
            14,492,551Intercompany
                sales elimination
            
            
            **(505,061**
            **)**
            
            **(446,735**
            **)**
            
            (400,362
            )**5,265,209**
            
            
            **6,372,359**
            
            
            14,092,189**2006**
            
            
            **2005**
            
            
            **2004**$
            
            
            $
            
            
            $**Income
                (loss) before income taxes**Income
                  (loss) before income taxesfrom
                  segments
            
            
            (**537,147**
            **)**
            
            2,349,647
            
            
            (4,326
            )Unallocated
                corporate expenses
            
            
            **(771,149**
            **)**
            
            (642,870
            )
            
            (391,641
            )**(1,308,296**
            **)**
            
            1,706,777
            
            
            (395,967
            )**2006**
            
            
            **2005**$
            
            
            $**Assets**Segment
            
            
            
            
            
            **9,414,563**
            
            
            10,166,793Corporate
            
            
            
            
            
            **495,882**
            
            
            645,080**9,910,445**
            
            
            10,811,873





**2006****Total**
            
            
            
            **Consolidated****segments**
            
            **Corporate**
            
            **totals**$
            
            $
            
            $**Other
                significant items**Interest
                expense
            
            
            **28,396**
            
            
            **53,113**
            
            
            **81,509**Depreciation
                and amortization
            
            
            **543,023**
            
            
            **—**
            
            
            **543,023**Interest
                income
            
            
            **148,166**
            
            
            **—**
            
            
            **148,166**Capital
                expenditures
            
            
            **418,246**
            
            
            **—**
            
            
            **418,246**




51
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
        31, 2006




**2005****Total**
            
            
            
            **Consolidated****segments**
            
            **Corporate**
            
            **totals**$
            
            $
            
            $**Other
                significant items**Interest
                expense
            
            
            45,968
            
            
            45,242
            
            
            91,210Depreciation
                and amortization
            
            
            504,577
            
            
            8,518
            
            
            513,095Interest
                income
            
            
            133,117
            
            
            —
            
            
            133,117Capital
                expenditures
            
            
            182,691
            
            
            —
            
            
            182,691





**2004****Total**
            
            
            
            **Consolidated****segments**
            
            **Corporate**
            
            **totals**$
            
            $
            
            $**Other
                significant items**Interest
                expense
            
            
            69,177
            
            
            64,205
            
            
            133,382Depreciation
                and amortization
            
            
            601,898
            
            
            15,787
            
            
            617,685Interest
                income
            
            
            445
            
            
            —
            
            
            445Capital
                expenditures
            
            
            396,704
            
            
            —
            
            
            396,704





[c]
            Consolidated
                sales for the years ended January 31 by destination are as
                follows:





**2006**
            
            **2005**
            
            **2004**$
            
            $
            
            $Europe
            
            
            **2,237,430**
            
            
            2,130,180
            
            
            2,207,104United
                States
            
            
            **1,086,243**
            
            
            1,950,761
            
            
            10,008,794Pacific
                Rim
            
            
            **794,015**
            
            
            873,872
            
            
            692,980Canada
            
            
            **512,031**
            
            
            854,989
            
            
            655,471Other
            
            
            **635,490**
            
            
            562,557
            
            
            527,840**5,265,209**
            
            
            6,372,359
            
            
            14,092,189





[d]
            Long-lived
                assets by country of domicile are as
                follows:





**2006**
            
            **2005**$
            
            $Canada
            
            
            **3,284,816**
            
            
            3,135,872United
                States
            
            
            **61,889**
            
            
            69,357**3,346,705**
            
            
            3,205,229





[e]
            The
                following summarizes significant customer sales information for the
                years
                ended January 31. Customer A is a Dextran customer, while customer B
                is a customer of Chemdex.





**2006**
            
            **2005**
            
            **2004**$
            
            $
            
            $Customer
                A
            
            
            **1,111,402**
            
            
            886,749
            
            
            762,330Customer
                B
            
            
            **534,222**
            
            
            492,884
            
            
            **—**Customer
                C
            
            
            **—**
            
            
            268,186
            
            
            1,920,282Customer
                D
            
            
            —
            
            
            246,296
            
            
            2,133,597Customer
                E
            
            
            —
            
            
            143,258
            
            
            1,567,135**1,645,624**
            
            
            2,037,373
            
            
            6,383,344




52
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
        31, 2006


[f]
            The
                following summarizes significant enterprise-wide product group sales
                information of the Company for the years ended January 31:





**2006**
            
            **2005**
            
            **2004**$
            
            $
            
            $Bulk
                dextran and derivatives
            
            
            **5,265,209**
            
            
            5,280,458
            
            
            4,742,519Sterile
                injectible veterinary products
            
            
            **—**
            
            
            663,629
            
            
            5,697,292Oral
                and topical veterinary products
            
            
            **—**
            
            
            428,272
            
            
            3,652,378**5,265,209**
            
            
            6,372,359
            
            
            14,092,189





**17.
      FAIR VALUE OF FINANCIAL INSTRUMENTS**





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





The
      carrying values of cash and cash equivalents, trade accounts receivable,
      interest receivable and accounts payable approximate their fair values as at
      January 31, 2006 because of the short period to maturity of these financial
      instruments.





The
      estimated fair values of the bank indebtedness, due to shareholder, long-term
      debt and capital lease obligations are not materially different from the
      carrying values for financial statement purposes as at January 31, 2006 and
      2005. The estimated fair value of the amount due from shareholder is not
      determinable because the amount has no fixed terms of
      repayment.





53
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
        31, 2006


**18.
      OTHER DISCLOSURES**





**[a]**
            **Concentration
                of accounts receivable**





As
      at
      January 31, 2006, three [2005 - three] customers of the Company comprised 71%
      [2005 - 61%] of the trade accounts receivable balance. No other customers had
      trade accounts receivable outstanding at year end that represented more than
      10%
      of the Company's trade accounts receivable balance.





**[b]**
            **Foreign
                currency risk**





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





**19.
      ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)**





The
      components of other accumulated comprehensive income (loss) are as
      follows:





**2006**
            
            **2005**$
            
            $Unrealized
                gains (losses) on investments available for sale
            
            
            (12,349
            )
            
            (15,760
            )Currency
                translation
            
            
            957,599
            
            
            341,602**Accumulated
                other comprehensive income (loss)**
            
            
            945,250
            
            
            325,842








**20.
      RECENT ACCOUNTING PRONOUNCEMENTS**





In
      December 2004, the Financial Accounting Standards Board [the "FASB"] issued
      FASB
      Statement No. 123 (Revised 2004), "Share-Based Payment" ["Statement 123(R)"],
      which is a revision of FASB Statement No. 123, "Accounting for Stock-Based
      Compensation" ["Statement 123"]. Statement 123(R) supercedes APB Opinion No.
      25,
      "Accounting for Stock Issued to Employees" and amends FASB Statement No. 95,
      "Statement of Cash Flows". Generally, the approach in Statement 123(R) is
      similar to the approach described in Statement 123. However, Statement 123(R)
      requires all share-based payments to employees, including grants of employee
      stock options, to be recognized in the income statement based on their fair
      values. Pro forma disclosure is no longer an alternative. Effective February
      1,
      2003, the Company has adopted the fair value accounting method provided for
      under Statement 123 to apply recognition provisions to its employee stock
      options granted, modified or settled after February 1, 2003. Statement 123(R)
      will have no impact on the consolidated financial statements of the
      Company.





In
      November 2004, the FASB issued Statement 151, "Inventory Costs", which clarifies
      that abnormal amounts of idle facility expense, freight, handling costs and
      wasted materials should be recognized as current-period charges and requires
      the
      allocation of fixed production overheads to inventory based on the normal
      capacity of the production facilities. This guidance is effective for inventory
      costs incurred during fiscal years beginning after June 15, 2005. The Company
      does not anticipate that this guidance will impact the consolidated financial
      statements of the Company.





FASB
      issued Statement No. 152 “Accounting for Real Estate Time-Sharing Transactions”
an amendment of FASB Statements No. 66 and 67. This Statement amends FASB
      statement No. 66, Accounting for Sales of Real Estate, to reference the
      financial accounting and reporting guidance for real estate time-sharing
      transactions that is provided in AICPA Statement of Position. Statement 152
      will
      have no impact on the consolidated financial statements of the
      Company.





54
 **Polydex
            Pharmaccuticals Limited**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 [Expressed
            in United States dollars except where otherwise
            noted]




January
        31, 2006
  In
      December 2004, the FASB issued Statement 153, "Exchanges of Nonmonetary Assets",
      an amendment of APB Opinion No. 29, "Accounting for Nonmonetary Transactions".
      Statement 153 is based on the principle that exchanges of nonmonetary assets
      should be measured based on the fair value of the assets exchanged. Statement
      153 eliminates the narrow exception for nonmonetary exchanges of similar
      productive assets and replaces it with a broader exception for exchanges of
      nonmonetary assets that do not have commercial substance. Statement 153 is
      effective for nonmonetary asset exchanges occurring in fiscal periods beginning
      after June 15, 2005. The provisions of this Statement 153 should be applied
      prospectively. The Company does not anticipate that the application of this
      Statement 153 will have an impact on the consolidated financial statements
      of
      the Company.





FASB
      issued Statement No. 132 (revised 2003)- Employers’ Disclosures about Pensions
      and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88,
      and 106 (Issued 12/03),which revises employers’ disclosures about pension plans
      and other postretirement benefit plans. It does not change the measurement
      or
      recognition of those plans required by FASB Statements No. 87, Employers’
Accounting for Pensions, No. 88, Employers’ Accounting for Settlements and
      Curtailments of Defined Benefit Pension Plans and for Termination Benefits,
      and
      No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions.
      FASB Statement No. 132 will have no impact on the consolidated financial
      statements of the Company.





FASB
      issued Statement No. 154 - Accounting Changes and Error Corrections—a
      replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement
      replaces APB Opinion No. 20, *Accounting
      Changes,* and FASB
      Statement No. 3, *Reporting
      Accounting Changes in Interim Financial Statements,* and
      changes the requirements for the accounting for and reporting of a change in
      accounting principle. This Statement applies to all voluntary changes in
      accounting principle. It also applies to changes required by an accounting
      pronouncement in the unusual instance that the pronouncement does not include
      specific transition provisions. When a pronouncement includes specific
      transition provisions, those provisions should be followed. The Company does
      not
      anticipate that this guidance will impact the consolidated financial statements
      of the Company.





FASB
      issued Statement No. 155 - Accounting for Certain Hybrid Financial
      Instruments—an amendment of FASB Statements No. 133 and 140. This Statement
      amends FASB Statements No. 133, *Accounting
      for Derivative Instruments and Hedging Activities,* and No.
      140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities.* This
      Statement resolves issues addressed in Statement 133 Implementation Issue No.
      D1, “Application of Statement 133 to Beneficial Interests in Securitized
      Financial Assets.” FASB Statement No. 155 will have no impact on the
      consolidated financial statements of the Company.





SFAS
      No.
      156 - Accounting for Servicing of Financial Assets—an amendment of FASB
      Statement No. 140. This Statement amends FASB Statement No. 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities,* with
      respect to the accounting for separately recognized servicing assets and
      servicing liabilities. FASB Statement No. 156 will have no impact on the
      consolidated financial statements of the Company.





**21.
      COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS**





The
      comparative consolidated financial statements have been reclassified from
      statements previously presented to conform to the presentation of the 2006
      consolidated financial statements.





55


ITEM 9. CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE




On
      May
      27, 2005, the Company, acted to dismiss Ernst & Young LLP Chartered
      Accountants as its independent registered accounting firm. This determination
      followed the Company’s decision to seek proposals from independent registered
      accounting firms to audit its financial statements, and was approved by the
      Company’s Board of Directors upon the recommendation of its Audit Committee. The
      decision to terminate the Company’s relationship with Ernst & Young LLP
      Chartered Accountants did not involve a dispute with the Company over accounting
      policies or practices.





The
      independent audit report of Ernst & Young LLP Chartered Accountants on the
      consolidated financial statements of the Company as of and for the fiscal years
      ended January 31, 2005 and 2004 did not contain any adverse or disclaimer of
      opinion and were not qualified or modified as to uncertainty, audit scope or
      accounting principles. During the two fiscal years ended January 31, 2005 and
      during the interim period from that date to May 27, 2005, there were no
      disagreements with Ernst & Young LLP Chartered Accountants on any matter of
      accounting principles or practices, financial statement disclosure or auditing
      scope or procedure, which disagreements if not resolved to the satisfaction
      of
      Ernst & Young LLP Chartered Accountants, would have caused Ernst & Young
      LLP Chartered Accountants to make reference to the subject matter of the
      disagreements in connection with its report. No reportable events described
      under Item 304(a)(1)(v) of Regulation S-K occurred within the two fiscal years
      ended January 31, 2005 and during the period from that date to May 27,
      2005.





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




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




The
      independent audit report of the Company’s independent registered accounting firm
      on the consolidated financial statements of the Company as of and for the fiscal
      years ended January 31, 2005 and 2004 did not contain any adverse or disclaimer
      of opinion and were not qualified or modified as to uncertainty, audit scope
      or
      accounting principles. During the two fiscal years ended January 31, 2005 and
      during the interim period from that date to January 11, 2006, there were no
      disagreements with the Company’s independent registered accounting firm on any
      matter of accounting principles or practices, financial statement disclosure
      or
      auditing scope or procedure, which disagreements if not resolved to the
      satisfaction of the Company’s independent registered accounting firm, would have
      caused the Company’s independent registered accounting firm to make reference to
      the subject matter of the disagreements in connection with its report. No
      reportable events described under Item 304(a)(1)(v) of Regulation S-K occurred
      within the two fiscal years ended January 31, 2005 and during the period from
      that date to January 11, 2006.




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





56





ITEM
      9A.   CONTROLS
      AND PROCEDURES




The
      Company
      completed an evaluation as of the end of the period covered by this report
      under
      the supervision and with the participation of management, including its Chief
      Executive Officer and Chief Financial Officer, of the effectiveness of the
      design and operation of its disclosure controls and procedures pursuant to
      Rule
      13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation,
      the
      Chief Executive Officer and Chief Financial Officer concluded that the Company’s
      disclosure controls and procedures are effective in alerting them on a timely
      basis of material information relating to the Company (including its
      consolidated subsidiaries) required to be included in its periodic Securities
      and Exchange Commission filings.




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




ITEM
      9B.  OTHER
      INFORMATION




Not
      applicable.





57





**PART
      III**




ITEM
      10.   DIRECTORS
      AND EXECUTIVE OFFICERS OF THE REGISTRANT




The
      information required under this item is incorporated herein by reference from
      the material contained under the captions “Board of Directors,” “Proposals,”
“Executive Officers” and “Section 16(a) Beneficial Ownership Reporting
      Compliance” in the Company’s definitive proxy statement to be filed with the
      Securities and Exchange Commission in connection with its 2005 Annual Meeting
      of
      Members.




**Code
      of Ethics**




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




ITEM
      11.   EXECUTIVE
      COMPENSATION




The
      information required under this item is incorporated herein by reference from
      the material contained under the captions “Board of Directors,” “Board Meetings
      and Committees,” “Compensation of Executive Officers,” “Employment Agreements”
and “Company Stock Performance” in the Company’s definitive proxy statement to
      be filed with the Securities and Exchange Commission in connection with its
      2006
      Annual Meeting of Members.




ITEM
                12.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER
                  MATTERS




The
      information required under this item is incorporated herein by reference from
      the material contained under the captions “Ownership of Voting Securities” and
“Equity Compensation Plan Information” in the Company’s definitive proxy
      statement to be filed with the Securities and Exchange Commission in connection
      with its 2006 Annual Meeting of Members.




ITEM
      13.   CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS




The
      information required under this item is incorporated herein by reference from
      the material contained under the captions “Compensation of Executive Officers,”
“Compensation Committee Interlocks and Insider Participation” and “Transactions
      With the Company” in the Company’s definitive proxy statement to be filed with
      the Securities and Exchange Commission in connection with its 2006 Annual
      Meeting of Members.




ITEM
      14.   PRINCIPAL
      ACCOUNTANT FEES AND SERVICES




The
      information required under this item is incorporated herein by reference from
      the material contained under the caption “Principal Accountant Fees and
      Services” in the Company’s definitive proxy statement to be filed with the
      Securities and Exchange Commission in connection with its 2006 Annual Meeting
      of
      Members.





58





**PART
      IV**




ITEM
      15.   EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES




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




(1)  Financial
      Statements of Polydex Pharmaceuticals




Report
      of Independent
      Auditors — Schwartz Levitsky Feldman LLP


Report
      of Independent
      Auditors — Ernst & Young LLP Chartered Accountants


Consolidated
      Balance
      Sheets


Consolidated
      Statements of Shareholders’ Equity


Consolidated
      Statements of Operations


Consolidated
      Statements of Cash Flows


Notes
      to Consolidated
      Financial Statements




(2)  Financial
      Statement Schedules




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




(3)  Exhibits




3.1
            Memorandum
                of Association of Polydex Pharmaceuticals Limited, as amended (filed
                as
                Exhibit 3.1 to the Annual Report on Form 10-K filed April 30, 1997,
                and
                incorporated herein by reference)3.2
            Articles
                of Association of Polydex Pharmaceuticals Limited, as amended (filed
                as
                Exhibit 3.2 to the Quarterly Report on Form 10-Q filed September
                13, 1999,
                and incorporated herein by reference)10.1
            Employment
                Agreement between Polydex Pharmaceuticals Limited and George G. Usher
                dated December 22, 1993 (filed as Exhibit 10.2 to the Annual Report
                on
                Form 10-K filed April 30, 1997, and incorporated herein by
                reference)*10.2
            Amendment
                to Employment Agreement between Polydex Pharmaceuticals Limited and
                George
                G. Usher dated February 1, 1999 (filed as Exhibit 10.4 to the Annual
                Report on Form 10-K filed April 29, 1999, and incorporated herein
                by
                reference)*10.3
            Research
                Agreement among Dextran Products Limited, Canadian Microbiology
                Consortium, British Columbia’s Children’s Hospital and the University of
                British Columbia, dated April 1, 1996 (filed as Exhibit 10.4 to the
                Annual
                Report on Form 10-K filed April 30, 1997, and incorporated herein
                by
                reference)10.4
            Joint
                Venture Agreement among Chemdex, Inc., Veterinary Laboratories Inc.
                and
                Sparhawk Laboratories, Inc., dated December 1, 1992 (filed as Exhibit
                10.5
                to the Annual Report on Form 10-K filed April 30, 1997, and incorporated
                herein by reference)10.5
            Asset
                Purchase Agreement dated as of January 13, 2004, by and among Sparhawk
                Laboratories, Inc., Polydex Pharmaceuticals Limited, Chemdex, Inc.
                and
                Veterinary Laboratories, Inc. (filed as Exhibit 10.9 to the Annual
                Report
                on Form 10-K filed April 30, 2004, and incorporated herein by
                reference)





59




10.6
            Supply
                Agreement, dated as of March 1, 2004, by and between Chemdex, Inc.
                and
                Sparhawk Laboratories, Inc. (filed as Exhibit 10.10 to the Annual
                Report
                on Form 10-K filed April 30, 2004, and incorporated herein by
                reference)10.7
            Unsecured
                Subordinated Promissory Note dated March 4, 2004 made by Sparhawk
                Laboratories, Inc. in favor of Chemdex, Inc. (filed as Exhibit 10.11
                to
                the Annual Report on Form 10-K filed April 30, 2004, and incorporated
                herein by reference)10.8
            Warrant
                and Repurchase Agreement, dated March 4, 2004 issued by Sparhawk
                Laboratories, Inc. to Chemdex, Inc. (filed as Exhibit 10.12 to the
                Annual
                Report on Form 10-K filed April 30, 2004, and incorporated herein
                by
                reference)21
            Subsidiaries
                of Polydex Pharmaceuticals Limited (filed as Exhibit 21 to the Annual
                Report on Form 10-K filed April 28, 2000, and incorporated herein
                by
                reference)31.1
            Certification
                of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley
                Act
                of 200231.2
            Certification
                of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley
                Act
                of 200232.1
            Certification
                of Chief Executive Officer Pursuant to Section 906 of Sarbanes-Oxley
                Act
                of 200232.2
            Certification
                of Chief Financial Officer Pursuant to Section 906 of Sarbanes-Oxley
                Act
                of 2002





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





60





SIGNATURES




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





POLYDEX
                PHARMACEUTICALS LIMITEDDate:
                April 28, 2006
            By:/s/
                George G.
                UsherGeorge
                G. Usher, President andChief
                Executive Officer





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





Date:****April
                28, 2006
            /s/
                George G.
                UsherGeorge
                G. Usher, Director, Presidentand
                Chief Executive Officer(Principal
                Executive Officer)Date:
                April 28, 2006
            /s/
                Sharon
                WardlawSharon
                Wardlaw, Treasurer, Secretaryand
                Chief Financial Officer(Principal
                Financial and AccountingOfficer)Date:
                April 28, 2006
            /s/
                Joseph
                BuchmanJoseph
                Buchman, DirectorDate:
                April 28, 2006
            /s/
                Derek John Michael
                LedererDerek
                John Michael Lederer, DirectorDate:
                April 28, 2006
            /s/
                John L.E.
                SeidlerJohn
                L.E. Seidler, Director




61





EXHIBIT
      INDEX




31.1
            Certification
                of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley
                Act
                of 200231.2
            Certification
                of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley
                Act
                of 200232.1
            Certification
                of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 200232.2
            Certification
                of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002





62