<PAGE>

                                                                     EXHIBIT 13

POLYDEX PHARMACEUTICALS LIMITED

FINANCIAL HIGHLIGHTS TABLE A 5 year review

<TABLE>
<CAPTION>

Expressed in United States dollars
For the year ended January 31        2000            1999              1998             1997              1996
<S>                                  <C>             <C>               <C>              <C>               <C>
Sales from Continuing Operations     $13,096,449     $11,721,020       $9,842,365       $9,344,089        $8,459,563
Net Income(Loss) from
      Continuing Operations              969,843         572,393          488,162          122,390        (1,165,534)
Net Income(Loss)
      per Common Share                         0.32             0.19             0.17             0.04              (0.42)
Total Assets                          12,018,356       10,456,264        9,740,947        8,627,517         8,064,990
Long-term borrowings                   2,385,541        1,158,187        1,478,578        1,555,551         1,633,041
</TABLE>


                                                                              1
<PAGE>

SHAREHOLDER INFORMATION.

Market for the Company's Common Shares and Related Security Holder Matters.

The Company's common shares are listed for trading on the NASDAQ SmallCap
Market System under the symbol POLXF, and on the Boston Stock Exchange under
the symbol PXL.

The reported high and low bid prices of the common shares on the
over-the-counter market for the past two calendar years were as follows
(similar prices were quoted on the Boston Stock Exchange):

<TABLE>
<CAPTION>

Stock Price                                 (Low and High Bid)
Quarter Ended              2000                      1999                       1998
<S>                        <C>                       <C>                        <C>
March 31                   7.875-9.750               2.500-2.500                4.125-4.250
June 30                                              4.625-4.625                3.250-3.875
September 30                                         2.781-2.781                2.188-2.375
December 31                                          3.969-4.563                3.125-3.438
</TABLE>

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

As of March 31, 2000 there were approximately 751 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.


                                                                              1
<PAGE>

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


Fiscal year 2000 refers to the Company's fiscal year ended January 31, 2000.

2000 COMPARED TO 1999

The operations of the Company are carried on through Dextran Products Limited
("Dextran Products") in Canada and through Chemdex, Inc. ("Chemdex") in the
United States. The operations of Chemdex are carried on through its
wholly-owned subsidiary, Veterinary Laboratories, Inc. ("Vet Labs"). Each of
Dextran Products and Chemdex operates as a strategic business unit. Dextran
Products manufactures and sells bulk quantities of Dextran and several of its
derivatives to large pharmaceutical companies throughout the world. Chemdex
manufactures and sells veterinary pharmaceutical products and specialty
chemicals in the United States. The primary customers are distributors and
private labelers, who in turn sell to the end-user of these products.

Sales of the Company increased 12% or $1,375,429 to $13,096,449 in fiscal
2000 from $11,721,020 in fiscal 1999. The growth in sales was primarily due
to a greater volume at Chemdex, where sales increased by 14% or $1,108,011 to
$8,820,977 in fiscal 2000 from $7,712,966 in fiscal 1999, and accounted for
67% and 66% of the Company's sales in fiscal 2000 and 1999, respectively.

Chemdex products are broken down into 4 product lines. Injectables is the
largest product line accounting for 65% and 62% of Chemdex sales for fiscal
2000 and fiscal 1999, respectively. Sales of injectable products increased by
17% or $838,095 to $5,712,619 in fiscal 2000 from $4,874,524 in fiscal 1999
due to increased market penetration of the injectable line. Management
expects sales trends to continue to increase with the introduction of new
products in the coming years.

Sales at Dextran Products increased by 7% or $267,418 to $4,275,472 in fiscal
2000 from $4,008,054 in fiscal 1999, and accounted for 33% and 34% of the
Company's sales in fiscal 2000 and 1999, respectively. This increased sales
level was achieved in fiscal 2000 despite anticipated production
interruptions experienced in the fourth quarter due to the installation of
new production equipment. Demand for Dextran and related products remained
strong during the year and management expects such strong demand to continue.
Sales levels are expected to increase slightly next year.

The Company's gross profit decreased 3% or $106,482 to $3,623,513 in fiscal
2000 from $3,729,995 in fiscal 1999. As a percentage of sales, the Company's
gross profit decreased to 28% from 32% in fiscal 1999. Chemdex' gross profit
increased 18% or $283,666 to $1,878,155 in fiscal 2000 from $1,594,489 in
fiscal 1999. As a percentage of sales, Chemdex' gross profit remained
constant at 21% as compared to fiscal 1999. This rise in gross profit at
Chemdex was attributable to a 17% increased market penetration of the
injectable products. Management anticipates the approval of several
Abbreviated New Animal Drug Applications ("ANADAs")


                                                                              1
<PAGE>

during the coming years. Management believes that these approvals will result
in an increase in profit margins.

Dextran Products' gross profit, excluding profit on intercompany sales, was
$1,642,483 in fiscal 2000, representing 38% of sales. The gross profit and
margins decreased significantly during the fourth quarter of fiscal 2000 due
to the anticipated production interruptions during the installation of new
production equipment. No such production interruptions are scheduled for the
coming year, therefore margins are expected to return to normal levels.
Dextran Products' costs are incurred in Canadian dollars, while the majority
of its sales are in U.S. dollars. Therefore if the Canadian dollar rises in
relation to the U.S. dollar, margins decrease. In fiscal 2000 such currency
fluctuations resulted in only a 1% decrease in margins.

Selling, promotion, general and administrative expenses decreased by 9% to
$1,716,445 in fiscal 2000 from $1,881,378 in fiscal 1999 mainly due to a
reduction in senior management salaries. In fiscal 1999,the former President
of Chemdex, Natu Patel, retired and was not replaced. In addition, senior
management bonuses were reduced in fiscal 2000. As a percentage of sales,
selling, promotion, general, and administrative expenses decreased to 13% in
fiscal 2000 from 16% in fiscal 1999.

In fiscal 2000, the Company spent $677,111 on research and development
expenditures as compared to $234,825 in fiscal 1999. This increase of
$442,286 or 188% is due to new product development costs relating to the
development of a raw material for a human injectable product. Development
costs for this project are expected to continue in fiscal 2001. In addition,
there was a reduction in fiscal 2000 in the recognition of investment tax
credits, which offset the cost of research and development. The total
investment tax credit benefit recognized in fiscal 2000 was $39,794 as
compared to $201,762 in fiscal 1999. The investment tax credit benefit
recognized in fiscal 2000 relates strictly to investment tax credits earned
in the current year. The large benefit recognized in 1999 was a result of
utilizing previously unrecognized investment tax credit benefits. As a
result, the Company recorded research and development expense, net of
investment tax credits, of $637,317 and $33,063 in fiscal 2000 and fiscal
1999, respectively.

The Company has several research and development projects in process. The
Company is conducting part of its research through collaborations with Rush
Medical Center in Chicago, Illinois, on a potential female antimicrobial
contraceptive product ("Ushercell"), and the University of British Columbia
on a potential treatment for cystic fibrosis.

In fiscal 2000, the Company received a patent on the antimicrobial properties
of Ushercell in connection with the Program for the Topical Prevention of
Conception and Disease. During the year, Contraceptive Research and
Development ("CONRAD") Program and the Company received approval to initiate
a Phase I clinical trial on tolerance of the female contraceptive product.
This Phase I trial was successfully completed and CONRAD continues to support
this project. Management expects that funding for Phase II research will be
successfully obtained due to the success of the work to date.

In fiscal 2000, the Company licensed the cystic fibrosis product to BCY Ventures
Inc. ("BCY Ventures") of Vancouver, British Columbia. Under this license
agreement, BCY Ventures will


                                                                              2
<PAGE>

provide funding for research and development and will pay a royalty to the
Company based on sales and sublicensing revenue in return for the exclusive
right to sublicense, manufacture, distribute and sell the product or products
developed. BCY Ventures has since raised funds to continue the research and
development of the product.

Interest expense increased by 2% or $2,711 to $147,988 in fiscal 2000 from
$145,277 in fiscal 1999. Interest expense is expected to rise in fiscal 2001
because of the financing of the production equipment at Dextran Products.

Income from operations for the Company in fiscal 2000 totaled $601,963, a
decrease of $553,875 or 48% from $1,155,838 in fiscal 1999. Income from
operations at Chemdex remained relatively consistent at $684,655 in fiscal
2000, an increase of $16,258 or 2% from $668,397 in fiscal 1999. The increase
in sales and gross profit at Chemdex was offset by the increased research and
development costs.

Income from operations at Dextran Products in fiscal 2000 was $659,994, a
decrease of $734,295 or 53% from $1,394,289 in fiscal 1999. This decrease in
income from operations is a result of the decrease in gross profit, the
significant increase in research and development expenses and the decrease in
investment tax credit benefits recognized in fiscal 2000, as described above.

Interest and other non-operating income increased by 286% or $178,152 to
$240,432 in fiscal 2000 from $62,280 in fiscal 1999. This increase is a
result of recognizing the previously deferred gain on the sale of Novatek
International Inc. shares due to settlement of a lawsuit.

The recovery of income taxes in fiscal 2000 was $127,448 as compared to a
provision for income taxes in fiscal 1999 of $645,725. A tax recovery of
$400,000 was recorded in fiscal 2000 due to the reduction in the valuation
allowance against the United States deferred tax assets. The Company's United
States operations have now demonstrated sustained profitability and it is
more likely than not that the United States net operating tax losses will be
utilized, therefore the tax benefit of these losses has been recognized in
fiscal 2000.

A tax provision of $270,640 relating to Dextran Products was recorded in
fiscal 2000 as compared to $621,503 in fiscal 1999. The decrease in the
Canadian tax provision is a result of the decrease in profitability of
Dextran Products in fiscal 2000. The Canadian operations continue to have
significant research and development tax pools to offset current taxes
payable.

As a result of the foregoing, the Company recorded net income of $969,843 in
fiscal 2000 as compared to a net income of $572,393 in fiscal 1999.


                                                                             3
<PAGE>

1999 COMPARED TO 1998

Sales increased 19% or $1,878,655 to $11,721,020 in fiscal 1999 from
$9,842,365 in fiscal 1998. The growth in sales was primarily due to a greater
volume at Veterinary Laboratories Inc. ("Vet Labs"), where sales increased by
30% or $1,781,185 to $7,712,966 in fiscal 1999 from $5,931,781 in fiscal
1998, and accounted for 66% and 60% of the Company's sales in fiscal 1999 and
1998, respectively.

Vet Labs products are broken down into 4 product lines. Injectables is the
largest product line accounting for 62% and 60% of Vet Labs sales for fiscal
1999 and fiscal 1998, respectively. Sales of injectable products increased by
33% or $1,218,751 to $4,874,524 in fiscal 1999 from $3,655,773 in fiscal 1998
due to increased sales of Injectable Iron Dextran and of the two injectable
vitamin products added in fiscal 1998.

Sales at Dextran Products Limited ("Dextran Products") increased slightly by
2% or $97,470 to $4,008,054 in fiscal 1999 from $3,910,584 in fiscal 1998,
and accounted for 34% and 40% of the Company's sales in fiscal 1999 and 1998,
respectively. Demand for Dextran and related products remained strong during
the year. A reduction in the value of the Canadian dollar relative to the
U.S. dollar reduced sales levels by close to 1%. Management expects sales
demand to remain strong. Sales levels are expected to remain consistent next
year.

The Company's gross profit increased 25% or $745,769 to $3,729,995 in fiscal
1999 from $2,984,226 in fiscal 1998. As a percentage of sales, gross profit
increased to 32% from 30% in fiscal 1998. This was primarily due to the
performance of Vet Labs. Vet Labs' gross profit increased 82% or $717,383 to
$1,594,489 in fiscal 1999 from $877,106 in fiscal 1998. As a percentage of
sales, gross profit increased to 21% from 15% in fiscal 1998. This rise was
primarily attributable to the increased market penetration of Injectable Iron
Dextran, the two new injectable products added in fiscal 1998 and the
addition of three new powders, one of which is an approved ANADA. Management
anticipates the approval of several ANADAs during the year. Management
believes that these approvals will result in a continued increase in profit
margins.

Dextran Products' gross profit decreased 2% or $33,198 to $1,598,876 in
fiscal 1999 from $1,632,074 in fiscal 1998. As a percentage of sales, gross
profit decreased to 40% from 42% in fiscal 1998. The main reason for the
decrease in gross profit was an increase in materials costs without a
corresponding sales price increase. In addition, refurbishment of two
significant pieces of production equipment resulted in lost production time
and therefore increased cost of sales, towards the end of the fiscal year.
The decrease in margins was also partly offset by the effect of exchange
rates because Dextran Products costs are incurred in Canadian dollars, while
the majority of its sales are in U.S. dollars. Therefore if the Canadian
dollar drops in relation to the U.S. dollar, margins increase. In fiscal 1999
such currency fluctuations resulted in a further 4% increase in margins in
addition to a 1% increase for fiscal 1998.

Selling, promotion, general and administrative expenses decreased by 6% to
$1,881,378 in fiscal 1999 from $2,001,865 in fiscal 1998 mainly due to the
termination of a marketing contract


                                                                             4
<PAGE>

entered into in 1998. As a percentage of sales, selling, promotion, general,
and administrative expenses decreased to 16% in fiscal 1999 from 20% in
fiscal 1998.

Research and development expenses decreased by 82% or $151,838 to $33,063 in
fiscal 1999 from $184,901 in fiscal 1998 due mainly to the recognition of
investment tax credits of $201,762 in fiscal 1999, as a result of the
continued profitability of the Canadian operations. Total cash outlays for
research and development increased by 10% or $20,837 to $234,825 in fiscal
1999 from $213,988 in fiscal 1998 before taking into account the recognition
of investment tax credits. Investment tax credits recognized in fiscal 1998
amounted to $29,087.

The Company is conducting part of its research through collaborations with
the Rush Institute in Chicago, Illinois, on a potential female contraceptive
product, and the University of British Columbia on a potential treatment for
cystic fibrosis. These institutes received additional funding from government
sources during fiscal 1999 reducing the Company's cash requirements. Although
continued government funding is never certain, the Company expects that this
funding should continue due to the success of the work to date. The Company
is also developing a treatment for human anemia in conjunction with an
American pharmaceutical company. These projects are the primary focus of the
Company's research and development activities in an effort to concentrate our
resources. The Company is in discussion with potential partners who appear to
be interested in these projects with a view to joint venturing one or all of
them. The Company has been reviewing several new research projects and upon
the successful joint venturing of one or all of these projects, will initiate
a development program.

Interest expense increased by 12% or $16,078 to $145,277 in fiscal 1999 from
$129,199 in fiscal 1998. This increase is mainly due to an increase in
balance due to shareholder during the year. Interest and other non-operating
income increased by 7% or $3,967 to $62,280 in fiscal 1999 from $58,313 in
fiscal 1998.

The provision for income taxes in fiscal 1999 was $645,725 as compared to a
recovery of income taxes of $936,042 in fiscal 1998. $621,503 of this tax
provision in fiscal 1999 relates to Dextran Products. The Company utilized
Canadian tax loss carryforwards, investment tax credits and discretionary
deductions to shelter approximately $363,000 of taxes that would have been
payable in Canada for fiscal 1999. The Canadian operations still have
significant research and development tax pools to offset current taxes
payable. The tax recovery recorded in fiscal 1998 was due to the reduction in
the valuation allowance against the Canadian deferred tax assets. If the
Company's United States operations are able to demonstrate sustained
profitability in future years, a similar adjustment to the valuation
allowance may be required relating to the tax losses in the United States.

As a result of the foregoing, the Company recorded net income of $572,393 in
fiscal 1999 as compared to a net income of $488,162 in fiscal 1998.


                                                                             5
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

For fiscal 2000 the Company generated cash of $800,084 from its operating
activities compared to $1,656,015 for fiscal 1999. This decrease was
primarily attributable to a substantial increase in research and development
expenses. The Company maintained $1,735,162 of working capital and a current
ratio of 1.7:1 as of January 31, 2000 compared to $1,710,316 of working
capital and a current ratio of 1.9:1 as of January 31, 1999. This slight
decrease in working capital is primarily due to the settlement of a lawsuit
resulting from the sale of Novatek International Inc. shares.

At January 31, 2000, the Company had accounts receivable of $1,204,495 and
$2,051,251 in inventory compared to $984,934 and $1,917,278, respectively, at
January 31, 1999. The increase in accounts receivable was due to increased
sales at Vet Labs. The inventory levels have remained relatively consistent.

During fiscal 2000, capital expenditures totaled $1,318,626 as compared to
$976,236 in fiscal 1999. This increase is a result of continued refurbishment
costs at the Dextran Products plant in Toronto. The majority of these capital
expenditures at Dextran Products were financed with capital leases.

The change in the accumulated other comprehensive income is 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 U.S. dollars.

During fiscal 2000, the ContiGroup Companies, Inc. (formerly Continental
Grain Company) ("CGC") disposed of all its shareholdings of the Company.
Prior to this, the Company had a contingent purchase obligation for the
shares held by CGC. The Company is required to make payments totaling
$300,000 over the next two years and a final payment of $585,343 on March 15,
2002 to satisfy this purchase obligation.

During fiscal 2000, a lawsuit over the gain on sale of Novatek International
Inc. shares was settled. Under the terms of the settlement agreement, the
Company is required to make a payment of $150,000 on February 10, 2000 and 24
monthly payments of $13,542.

Dextran Products has a CDN$750,000 line of credit of which there were no
outstanding borrowings as of January 31, 2000. Management anticipates using
the credit line for the purposes of funding a portion of the costs associated
with the refurbishment of the Toronto facility.

Management expects the primary source of its future capital needs to be a
combination of company earnings and borrowings. The Company, at present, does
not have any material commitments for capital expenditures, although
management plans to continue the plant refurbishment at Dextran Products.


                                                                             6
<PAGE>

No changes in accounting principles or their application have been
implemented in the reporting period that would have a material effect on
reported income. Changes in the relative values of the Canadian dollar and
the U.S. dollar occur from time to time and may, in certain instances,
materially affect the Company's results of operations.

The Company does not believe that the impact of inflation and changing prices
on its operations are material.

IMPACT OF YEAR 2000

In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission
critical information technology and non-information technology systems and
believes those systems successfully responded to the Year 2000 date change.
In fiscal 2000, there were no significant costs in connection with
remediating its systems. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal
systems, or the products and services of third parties. The Company will
continue to monitor its mission critical computer applications and those of
its suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.

MANAGEMENT OBJECTIVES

Management's primary objective for the coming year at Dextran Products is to
continue with plant refurbishment. Management has performed extensive
planning for the refurbishing process and believes that it will continue for
another two years. This year, management plans to upgrade the electrical room
to increase capacity and install a new piece of production equipment. There
are no scheduled production interruptions as a result of this refurbishing in
fiscal 2001. Although management believes that production interruptions will
be minimal, management is developing contingency plans in case there are
unexpected production interruptions. When fully complete, management expects
the refurbishing to increase capacity by 50 to 100% with increased operating
efficiencies. Until the refurbishing is complete, however, there could be
decreases in profit margins due to the increased overhead costs and
unexpected production interruptions.

Management's primary objective at Vet Labs is product development and
marketing of licensed products. These licensed products require individual
approval by the United States Food and Drug Administration ("FDA") and
consequently offer greater profit margins. Primary emphasis will be placed on
the approval of injectable ANADAs and secondary emphasis on the approval of
solutions and powders.


                                                                             7
<PAGE>

FORWARD-LOOKING STATEMENTS SAFE HARBOR

This Annual Report, including the Management's Discussion and Analysis of
Financial Condition and Results of Operations section, contains various
"forward-looking statements" within the meaning of Section 27A of the United
States Securities Act of 1933, as amended, and Section 21E of the United
States Securities Exchange Act of 1934, as amended, which represent the
Company's expectations or beliefs concerning future events, including, but
not limited to statements regarding management's expectations of regulatory
approval and the commencement of sales. In addition, statements containing
expressions such as "believes", "anticipates" or "expects" used in this
Annual Report and the Company's periodic reports on Forms 10-K and 10-Q filed
with the Securities and Exchange Commission are intended to identify
forward-looking statements. The Company cautions that these and similar
statements in this Annual Report and in previously filed periodic reports
including reports filed on Forms 10-K and 10-Q are further qualified by
important factors that could cause actual results to differ materially from
those in the forward-looking statements. These factors include, without
limitation, changing market conditions, the progress of clinical trials and
the results obtained, the establishment of new corporate alliances, the
impact of competitive products and pricing, and the timely development, FDA
approval and market acceptance of the Company's products, none of which can
be assured. Results actually achieved may differ materially from expected
results as a result of these or other factors.


                                                                             8
<PAGE>

                                    CONSOLIDATED FINANCIAL STATEMENTS
                                    [Expressed in United States dollars]

                                    POLYDEX PHARMACEUTICALS LIMITED



                                    JANUARY 31, 2000, 1999 AND 1998


<PAGE>

                         REPORT OF INDEPENDENT AUDITORS



To the Board of Directors and Shareholders of
POLYDEX PHARMACEUTICALS LIMITED

We have audited the accompanying consolidated balance sheets of POLYDEX
PHARMACEUTICALS LIMITED AND SUBSIDIARIES as of January 31, 2000 and 1999 and
the related consolidated statements of shareholders' equity, operations and
cash flows for each of the years in the three-year period ended January 31,
2000. 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 auditing standards generally
accepted in the 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. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. 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 AND SUBSIDIARIES as of January 31, 2000 and 1999 and
the consolidated results of their operations and their cash flows for each of
the years in the three-year period ended January 31, 2000 in conformity with
accounting principles generally accepted in the United States.



Toronto, Canada,                                          /s/ Ernst & Young LLP
March 10, 2000.                                           Chartered Accountants


<PAGE>


POLYDEX PHARMACEUTICALS LIMITED

                           CONSOLIDATED BALANCE SHEETS
                      [Expressed in United States dollars]

As at January 31

<TABLE>
<CAPTION>

                                                                          2000               1999
                                                                            $                  $
--------------------------------------------------------------------------------------------------
<S>                                                                <C>                <C>
ASSETS [NOTES 7, 8 AND 11]
CURRENT
Cash                                                                   799,565            655,131
Trade accounts receivable [NOTE 17]                                  1,204,495            984,934
Inventories [NOTE 3]                                                 2,051,251          1,917,278
Prepaid expenses and other current assets                               73,072             69,188
--------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                 4,128,383          3,626,531
Property, plant and equipment, net [NOTE 4]                          5,154,333          4,233,144
Patents, net [NOTE 5]                                                  153,611            166,404
Due from Novadex Corp. [NOTE 6]                                             --            658,574
Due from shareholder [NOTE 6]                                        1,396,615            903,037
Deferred income taxes [NOTE 13]                                      1,146,000            776,000
Other assets                                                            39,414             92,574
--------------------------------------------------------------------------------------------------
                                                                    12,018,356         10,456,264
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable                                                     1,279,778          1,189,886
Accrued liabilities                                                    454,824            466,556
Income taxes payable                                                    17,072             51,779
Current portion of long-term debt [NOTE 8]                             523,454             63,783
Current portion of capital lease obligations [NOTE 8]                  118,093             44,211
Current portion of mandatorily redeemable capital stock [NOTE 11]           --            100,000
--------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                            2,393,221          1,916,215
Long-term debt [NOTE 8]                                              1,096,473            413,919
Capital lease obligations [NOTE 8]                                     616,302            107,251
Due to shareholder [NOTE 6]                                            672,766            637,017
Deferred gain [NOTE 9]                                                      --            659,018
Deferred income taxes [NOTE 13]                                        274,960            148,083
Mandatorily redeemable capital stock [NOTE 11]                              --            300,000
--------------------------------------------------------------------------------------------------
TOTAL LIABILITIES                                                    5,053,722          4,181,503
--------------------------------------------------------------------------------------------------
Redeemable capital stock [nil common shares;
   1999 - 93,899] [NOTE 11]                                                 --          1,028,733
SHAREHOLDERS' EQUITY
Capital stock [NOTES 10 AND 11]
   Authorized
     100,000 Class A preferred shares of $0.10 each
     899,400 Class B preferred shares of $0.0167 each
     4,000,000 common shares of $0.0167 each
   Issued and outstanding
     899,400 Class B preferred shares                                   15,010             15,010
     3,021,917 common shares [1999 - 2,923,018]                         50,203             48,552
Contributed surplus                                                 23,121,345         22,464,783
Deficit                                                            (15,528,932)       (16,498,775)
Accumulated other comprehensive income                                (692,992)          (783,542)
--------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY                                           6,964,634          5,246,028
--------------------------------------------------------------------------------------------------
                                                                    12,018,356         10,456,264
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
</TABLE>

SEE ACCOMPANYING NOTES

<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


Years ended January 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>

                                                                                 ACCUMULATED OTHER    TOTAL
                                   PREFERRED   COMMON     CONTRIBUTED             COMPREHENSIVE    SHAREHOLDERS'
                                    SHARES     SHARES       SURPLUS    DEFICIT        INCOME         EQUITY
                                      $          $            $          $               $              $
------------------------------------------------------------------------------------------------------------------
<S>                                <C>         <C>        <C>        <C>         <C>               <C>
BALANCE, JANUARY 31, 1997           15,010      44,456    20,735,822 (17,559,330)   (535,230)      2,700,728

Exercise of options for
   services provided                    --          40        17,990          --         --           18,030
Common shares issued for cash
   through private placement            --       2,661       997,339          --         --        1,000,000
Common shares issued for
   interest in Novadex
   International Inc.                   --         126        74,874          --         --           75,000
Net income for the year                 --          --            --     488,162         --          488,162
Currency translation
   adjustment                           --          --            --          --   (130,538)        (130,538)
------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 1998           15,010      47,283    21,826,025 (17,071,168)  (665,768)       4,151,382

Renegotiation of Vet Labs
   agreement [NOTE 11]                  --         935       570,332          --         --          571,267
Common shares issued in
   exchange for research and
   development                          --         334        68,426          --         --           68,760
Net income for the year                 --          --            --     572,393         --          572,393
Currency translation
   adjustment                           --          --            --          --   (117,774)        (117,774)
-------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 1999           15,010      48,552    22,464,783 (16,498,775)  (783,542)       5,246,028

Reclassification from
   redeemable capital
   stock [NOTE 11]                      --       1,568       441,822          --         --          443,390
Fair value adjustment of
   remaining purchase
   obligation [NOTE 11]                 --          --       183,530          --         --          183,530
Common shares issued in
   exchange for research and
   development                          --          83        21,332          --         --           21,415
Common share options issued in
   exchange for research and
   development                          --          --         9,878          --         --            9,878
Net income for the year                 --          --            --     969,843         --          969,843
Currency translation
   adjustment                           --          --            --          --     90,550           90,550
------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 31, 2000           15,010      50,203    23,121,345 (15,528,932)  (692,992)       6,964,634
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
</TABLE>

SEE ACCOMPANYING NOTES


<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      [Expressed in United States dollars]


Years ended January 31

<TABLE>
<CAPTION>

                                                        2000              1999               1998
                                                          $                 $                  $
------------------------------------------------------------------------------------------------------------------
<S>                                               <C>               <C>                 <C>
SALES                                             13,096,449        11,721,020          9,842,365
Cost of goods sold                                 9,472,936         7,991,025          6,858,139
------------------------------------------------------------------------------------------------------------------
GROSS MARGIN                                       3,623,513         3,729,995          2,984,226
------------------------------------------------------------------------------------------------------------------

EXPENSES
General and administrative                         1,595,088         1,728,050          1,599,255
Research and development, net [NOTE 12]              637,317            33,063            184,901
Depreciation                                         497,822           458,107            450,136
Interest [NOTE 6]                                    147,988           145,277            129,199
Selling and promotion                                121,357           153,328            402,610
Amortization                                          21,978            56,332            116,506
Write-down of patents [NOTE 5]                            --                --            608,994
------------------------------------------------------------------------------------------------------------------
                                                   3,021,550         2,574,157          3,491,601
------------------------------------------------------------------------------------------------------------------
Income (loss) from operations                        601,963         1,155,838           (507,375)
Other income
   Interest and other [NOTES 6 AND 9]                240,432            62,280             58,313
-------------------------------------------------------------------------------------------------------------------
Income (loss) before the undernoted                  842,395         1,218,118           (449,062)
Provision for (recovery of)
   income taxes [NOTE 13]                           (127,448)          645,725           (936,042)
Minority interest                                         --                --              1,182
------------------------------------------------------------------------------------------------------------------
NET INCOME FOR THE YEAR                              969,843           572,393            488,162
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------

PER SHARE INFORMATION
Earnings per common share
   Basic                                              $0.32              $0.19              $0.17
   Diluted                                            $0.32              $0.19              $0.17
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------

Weighted average number of common shares
   outstanding for the year                        3,017,542         2,999,415          2,923,864
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
</TABLE>

SEE ACCOMPANYING NOTES


<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


Years ended January 31

<TABLE>
<CAPTION>

                                                        2000              1999               1998
                                                          $                 $                  $
---------------------------------------------------------------------------------------------------
<S>                                                <C>               <C>                <C>
OPERATING ACTIVITIES
Net income for the year                              969,843           572,393            488,162
Add (deduct) items not affecting cash
   Depreciation and amortization                     519,800           514,439            566,642
   Write-down of patents                                  --                --            608,994
   Deferred income taxes                            (310,943)          363,125           (936,042)
   Legal expenses charged to deferred gain [NOTE 9]  (33,684)          (13,351)          (104,195)
   Gain on sale of Novatek International Inc.
     shares                                         (192,892)               --                 --
   Royalty expense and interest income charged to
     due from Novadex Corp. and shareholder           55,915            53,611             53,024
   Minority interest                                      --                --             (1,182)
   Common shares issued in exchange for research
     and development [NOTE 10]                        21,415            68,760             18,030
   Options issued in exchange for research and
      development                                      9,878                --                 --
Net change in non-cash working capital balances
   related to operations [NOTE 14]                  (239,248)           97,038           (496,944)
---------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES                800,084         1,656,015            196,489
---------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES
Additions to property, plant and
   equipment and patents                          (1,318,626)         (976,236)          (402,693)
Repayment of due from shareholder, net                    --            32,379           (935,416)
---------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES                 (1,318,626)         (943,857)        (1,338,109)
---------------------------------------------------------------------------------------------------

FINANCING ACTIVITIES
Proceeds from long-term debt                          77,681            20,000                 --
Repayment of long-term debt                          (69,711)          (60,321)           (66,817)
Proceeds from capital lease obligations              610,566           158,473                 --
Repayment of capital lease obligations               (27,633)           (7,012)                --
Payment of mandatorily redeemable capital stock     (100,000)               --                 --
Decrease in due from Novadex Corp. and shareholder   109,081                --                 --
Increase (decrease) in due to shareholder             35,749            46,491            (14,949)
Repayment of amount due to affiliated companies           --          (425,420)                --
Private placement of common shares                        --                --          1,000,000
---------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES      635,733          (267,789)           918,234
---------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash               27,243           (77,765)           (91,578)
---------------------------------------------------------------------------------------------------

NET INCREASE (DECREASE) IN CASH DURING THE YEAR      144,434           366,604           (314,964)
Cash, beginning of year                              655,131           288,527            603,491
---------------------------------------------------------------------------------------------------
CASH, END OF YEAR                                    799,565           655,131            288,527
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>

SEE ACCOMPANYING NOTES


<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998


1. GENERAL

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

2. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION

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

RESEARCH AND DEVELOPMENT

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

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
overhead expenses.

DEPRECIATION AND AMORTIZATION

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

Buildings                               15 years
Machinery and equipment                 3 to 10 years

Patents are amortized on a straight-line basis over their estimated useful lives
of ten years.


                                                                             1
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998



REVENUE RECOGNITION

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

FOREIGN CURRENCY TRANSLATION

The functional currency of the Company's Canadian operations has been determined
to be Canadian dollars. All asset and liability accounts of these companies have
been translated into United States dollars using the current exchange rates at
the 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 within shareholders'
equity.

STOCK OPTIONS

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

USE OF ESTIMATES

The preparation of financial statements in conformity with 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 these estimates.

EARNINGS PER COMMON SHARE

Basic earnings per common share is computed using the weighted average number
of shares outstanding. Diluted earnings per common share are computed using
the weighted average number of shares outstanding, including redeemable
capital stock, adjusted for the incremental shares, using the treasury stock
method, attributed to outstanding options to purchase common stock.
Incremental shares of 1,228, nil and 5,880 in 2000, 1999 and 1998,
respectively, were used in the calculation of diluted earnings per common
share. Options to purchase 615,077, 637,577


                                                                             2

<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998


and 151,096 common shares in 2000, 1999 and 1998, respectively, were not
included in the computation of diluted earnings per common share because the
option exercise price was greater than the average market price of the common
shares.

COMPREHENSIVE INCOME

The only component of other comprehensive income is the cumulative
translation adjustments arising on translation of the Company's Canadian
operations. Because cumulative translation adjustments are considered a
component of permanently invested unremitted earnings of foreign
subsidiaries, and as it is not practical to determine the amount, no income
taxes are provided on such amounts.

3. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>

                                                                         2000               1999
                                                                           $                  $
---------------------------------------------------------------------------------------------------
<S>                                                                  <C>                <C>
Finished goods                                                       1,430,329          1,186,110
Work-in-process                                                         30,188             53,023
Raw materials                                                          590,734            678,145
---------------------------------------------------------------------------------------------------
                                                                     2,051,251          1,917,278
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>

                                              2000                               1999
                                ------------------------------     ------------------------------
                                                          NET                                 NET
                                        ACCUMULATED      BOOK                ACCUMULATED     BOOK
                               COST    DEPRECIATION     VALUE      COST     DEPRECIATION    VALUE
                                 $           $             $          $           $            $
----------------------------------------------------------------------------------------------------
<S>                          <C>       <C>          <C>         <C>         <C>         <C>
Land and buildings           3,326,853    653,373   2,673,480   3,190,251     505,790   2,684,461
Machinery and equipment      6,613,257  4,132,404   2,480,853   5,526,365   3,977,682   1,548,683
----------------------------------------------------------------------------------------------------
                             9,940,110  4,785,777   5,154,333   8,716,616   4,483,472   4,233,144
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>

Included in machinery and equipment are assets under capital lease with a total
cost of $883,400

                                                                             3

<PAGE>
POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998



[1998 - $149,000] and accumulated depreciation of $23,000 [1998- $2,600].
Depreciation of assets under capital lease is included in depreciation expense.

5. PATENTS

Patents consist of the following:

<TABLE>
<CAPTION>

                                                                         2000               1999
                                                                           $                  $
---------------------------------------------------------------------------------------------------
<S>                                                                    <C>                <C>
Cost                                                                   395,133            385,948
Less accumulated amortization                                          241,522            219,544
---------------------------------------------------------------------------------------------------
                                                                       153,611            166,404
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>

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

6. RELATED PARTY TRANSACTIONS

Amounts due from (to) related parties consist of the following:

<TABLE>
<CAPTION>

                                                                          2000               1999
                                                                            $                  $
----------------------------------------------------------------------------------------------------
<S>                                                                  <C>                 <C>
Amounts due from Novadex Corp. [i] [NOTE 12]                                --            658,574
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------

Amounts due from shareholder [ii]                                    1,396,615            903,037
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------

Amounts due to shareholder [iii]                                      (672,766)          (637,017)
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>

   [i] Novadex Corp. was controlled by an officer, director and major
       shareholder of the Company [the "Major Shareholder"]. During July 1999,
       Novadex Corp. was liquidated. All assets and liabilities of Novadex Corp.
       were assumed by the Major Shareholder,

                                                                             4

<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998



       including the pledge of the royalty agreement described below. The
       transfer of the balance receivable from Novadex Corp. to the amounts
       due from shareholder has not been reflected in the consolidated
       statements of cash flows as it is a non-cash transaction.

       The amounts due from Novadex Corp. had no fixed terms of repayment and
       were non-interest bearing, except that an amount of nil [1999 - $110,474]
       included in the balance bore interest at the Canadian bank's prime
       lending rate [2000 - 6.5%; 1999 - 6.75%]. Amounts due from Novadex Corp.
       were collateralized by the pledge of future royalty payments [NOTE
       12[a]].

  [ii] Amounts due from shareholder are due from the Major Shareholder and bear
       interest at the Canadian bank's prime lending rate plus 1.5% [2000 - 8%;
       1999 - 8.25%], except for an amount of $798,100 which is non-interest
       bearing and an amount of $60,966 which bears interest at the Canadian
       bank's prime lending rate [2000 - 6.5%; 1999 - 6.75%]. These amounts have
       no fixed terms of repayment. The Major Shareholder has pledged 328,051
       shares of the Company and has pledged future royalty payments from the
       iron dextran process license agreement [NOTE 12[a]] as collateral for
       this loan.

 [iii] Amounts due to shareholder bear interest at the Canadian bank's prime
       lending rate plus 1.5% [2000 - 8%; 1999 - 8.25%]. The Company is required
       to make monthly payments of $1,000. Upon the death of either the
       shareholder or the Major Shareholder, the required monthly payment
       increases to $5,000. This loan may not be called.

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

<TABLE>
<CAPTION>

                                                        2000              1999               1998
                                                          $                 $                  $
---------------------------------------------------------------------------------------------------
<S>                                                   <C>               <C>                <C>
Interest income                                       60,626            38,472             33,019
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------

Interest expense                                      51,589            50,219             46,768
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>

7. BANK INDEBTEDNESS

The Company has an operating line of credit of Cdn. $750,000 [U.S. $516,800]
[1999 - Cdn. $300,000, U.S. $198,500], none of which was utilized at January 31,
2000 [1999 - nil]. This line of credit bears interest at the Canadian bank's
prime lending rate plus 1.25% [2000 - 7.75%; 1999 - 8.25%]. Bank indebtedness is
collateralized by a general security agreement over the Company's assets.


                                                                             5
<PAGE>
POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998



8. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

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

<TABLE>
<CAPTION>

                                                                                    2000               1999
                                                                                      $                  $
------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>              <C>
     Mortgage payable [Cdn.$100,925] in monthly instalments, bearing
       interest at 8.5%, and maturing January 2002, collateralized by land
       and building with a carrying value of $1,044,294 [Cdn.$1,515,479]
       as at January 31, 2000                                                      69,546           96,399
     Note payable to bank, maturing December 13, 2002, bearing interest at 9%,
       collateralized by assignments of land, building and equipment with a
       carrying value of $1,909,489 as at January 31, 2000                        358,141          349,674
     Share value guarantee payable in semi-annual repayments of $75,000 for each
       of the next two years and a lump-sum payment for the balance of $585,343
       on March 15, 2002. The total amount of repayments of $885,343, presented
       on a fair value basis at a discount rate of 9%, is non-interest bearing
       and is collateralized by the assets of Veterinary Laboratories, Inc.
       which have a carrying value of $3,129,600 as at January 31, 2000
       [NOTE 11[a]]                                                               701,813               --
     Lawsuit settlement payable in 24 monthly payments of $13,542
       commencing on March 15, 2000, plus a lump-sum payment of $150,000
       on February 10, 2000.  The total amount of payments of $475,000 is
       presented on a fair value basis at a discount rate of 9% [NOTE 9]          432,442               --
     Other                                                                         57,985           31,629
------------------------------------------------------------------------------------------------------------------
                                                                                1,619,927          477,702
     Less current portion                                                         523,454           63,783
------------------------------------------------------------------------------------------------------------------
                                                                                1,096,473          413,919
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
</TABLE>


                                                                             6
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998



     Principal repayments on the long-term debt are as follows:
<TABLE>
<CAPTION>

                                                                                               $
----------------------------------------------------------------------------------------------------
     <S>                                                                                <C>
     2001                                                                                 551,580
     2002                                                                                 393,665
     2003                                                                                 900,770
----------------------------------------------------------------------------------------------------
     Total principal repayments                                                         1,846,015
     Less amount representing imputed interest                                            226,088
----------------------------------------------------------------------------------------------------
                                                                                        1,619,927
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>

[b] Capital lease obligations consist of the following:

<TABLE>
<CAPTION>

                                                                                    2000               1999
                                                                                      $                  $
------------------------------------------------------------------------------------------------------------------
     <S>                                                                        <C>                <C>
     Obligation [Cdn.$162,056] under a capital lease, in monthly instalments,
       bearing interest at a 8.5%, and maturing May 2002. The Company has an
       option to purchase the asset for $16,500 [Cdn.$24,000] in November 2001,
       or at fair market value at the end
       of the lease term                                                         111,670            151,462
     Obligation [Cdn.$903,699] 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 $72,000
       [Cdn.$104,500] in April 2006, or at fair
       market value at the end of the lease term                                 622,725                 --
------------------------------------------------------------------------------------------------------------------
                                                                                 734,395            151,462
     Less current portion                                                        118,093             44,211
------------------------------------------------------------------------------------------------------------------
                                                                                 616,302            107,251
------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------
</TABLE>


                                                                             7
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998




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

<TABLE>
<CAPTION>

                                                                                               $
-----------------------------------------------------------------------------------------------------
     <S>                                                                                  <C>
     2001                                                                                 178,953
     2002                                                                                 185,843
     2003                                                                                 121,277
     2004                                                                                 121,277
     2005                                                                                 121,277
     Thereafter                                                                           233,681
-----------------------------------------------------------------------------------------------------
     Total minimum lease payments                                                         962,308
     Less amount representing imputed interest                                            227,913
-----------------------------------------------------------------------------------------------------
                                                                                          734,395
-----------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------
</TABLE>

9. COMMITMENTS AND CONTINGENCIES

DEFERRED GAIN

During the year ended January 31, 1997, the Company sold its shares in
Novatek International Inc., an unrelated company, for a gain of $878,412.
Prior to April 28, 1996, these shares were subject to options held by
unrelated parties. After April 28, 1996, these options expired and the
Company sold the shares in the open market realizing the gain. Subsequently,
the former option holders filed a lawsuit against the Company for unspecified
damages alleging that the Company denied them the opportunity to exercise
their options. A settlement agreement was reached effective January 31, 2000.
Under the terms of the settlement agreement, the Company will pay $150,000 by
February 10, 2000 and $325,000 in 24 equal monthly installments of $13,542
commencing March 15, 2000. The fair value of the amount owing under the
settlement agreement is included in long-term debt [NOTE 8].

The Company had deferred the gain on this transaction prior to fiscal 2000
until the likelihood of the outcome of the lawsuit was determinable. As a
result of the settlement of the lawsuit, a gain of $192,892 was recognized
during the year ended January 31, 2000. The deferred gain had been reduced by
legal fees of $33,684 in 2000, $13,351 in 1999 and $104,195 in 1998.


                                                                             8
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998




10. CAPITAL STOCK

[a]  SHARE CAPITAL ISSUED AND OUTSTANDING

     [i] COMMON SHARES

     On January 11, 1999, the Company entered into an agreement to grant common
     shares and common share options to individuals involved in obtaining
     research grants for the Company. 20,000 common shares and 7,500 common
     share options were granted on January 11, 1999. A further 5,000 common
     shares and 3,750 common share options were granted to these individuals on
     January 11, 2000. Under this agreement, the Company has a commitment to
     grant an additional 5,000 common shares and 3,750 common share options on
     January 11, 2001, subject to the completion of certain specified
     performance criteria. All common share options have an exercise price of
     $3.50 and a term of 5 years from date of issue. The 5,000 common shares
     issued on January 11, 2000 were valued at $21,415, using the closing market
     price on that day. The 3,750 common share options issued on January 11,
     2000 were valued at $9,878 using a Black-Scholes option pricing model. The
     value of the common shares and options issued was charged to research and
     development expense. The 20,000 common shares issued on January 11, 1999
     were valued at $68,760, using the closing market price on that day. The
     value of the 7,500 common share options issued on January 11, 1999 was not
     significant and, therefore, was not recorded in the accounts.

     During the year ended January 31, 1999, the Company issued 20 common shares
     for no consideration to adjust for fractional shares created by the reverse
     share split.

     During the year ended January 31, 1998, the shareholders of the Company
     passed a resolution authorizing a one-for-ten reverse share split. All
     comparative amounts and per share amounts have been restated to reflect the
     impact of this reverse split on a retroactive basis.

     During 1998, the Company issued 159,680 common shares for $1,000,000 in
     cash in a private placement. The Company also issued 2,404 common shares in
     exchange for past services rendered, valued at $18,030, 7,500 common shares
     in exchange for the 10% minority interest in the subsidiary, Novadex
     International Inc., and 2,095 common shares for no consideration to adjust
     for fractional shares created by the reverse share split.


                                                                             9
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998




     [ii] 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.

     [iii] CLASS B PREFERRED SHARES

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

[b] SHARE OPTION PLAN

     [i] OPTIONS OUTSTANDING

     The Company maintains an incentive share option plan for management
     personnel for an unlimited number of options to purchase common shares.
     Options granted have terms ranging from one to five years and vest
     immediately. At January 31, 2000, the Company has 620,627 options
     outstanding at exercise prices ranging from $2.75 to $10.00, and a weighted
     average price of $5.47. The options, which are immediately exercisable and
     expire on dates between May 31, 2000 and January 11, 2005, entitle the
     holder of an option to acquire one common share of the Company.

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

<TABLE>
<CAPTION>

                                                                            WEIGHTED AVERAGE
                                           SHARE OPTIONS                EXERCISE PRICE PER SHARE
                                 -------------------------------       --------------------------
                                  2000         1999         1998       2000       1999       1998
                                    #            #            #          $          $          $
-------------------------------------------------------------------------------------------------
     <S>                      <C>          <C>          <C>           <C>        <C>        <C>
     OPTIONS OUTSTANDING,
       BEGINNING OF YEAR       640,327      266,673      317,077       5.59       9.13       9.10
     Granted                   113,127      480,327      139,077       4.38       4.12       8.03
     Exercised                      --           --       (2,404)        --         --       7.50
     Cancelled or expired     (132,827)    (106,673)    (187,077)      7.11       7.83       8.08
-------------------------------------------------------------------------------------------------
     OPTIONS OUTSTANDING,
       END OF YEAR             620,627      640,327      266,673       5.47       5.59       9.13
-------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------
</TABLE>

     WEIGHTED AVERAGE FAIR
       VALUE OF OPTIONS GRANTED



                                                                             10

<PAGE>

January 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>

                                                                            WEIGHTED AVERAGE
                                           SHARE OPTIONS                EXERCISE PRICE PER SHARE
                                 -------------------------------       --------------------------
                                  2000         1999         1998       2000       1999       1998
                                    #            #            #          $          $          $
-------------------------------------------------------------------------------------------------
       <S>                    <C>          <C>          <C>           <C>        <C>        <C>
       DURING THE YEAR           $0.92        $2.37        $2.29
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
</TABLE>


                                                                             11
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998




     The following table summarizes information relating to the options
     outstanding at January 31, 2000:

<TABLE>
<CAPTION>

                                                NUMBER           WEIGHTED AVERAGE       WEIGHTED
                                            OUTSTANDING AT           REMAINING          AVERAGE
   EXERCISE                                   JANUARY 31,        CONTRACTUAL LIFE      EXERCISE
     PRICES                                      2000                [MONTHS]             PRICE
        $                                                                                    $
----------------------------------------------------------------------------------------------------
     <S>                                    <C>                  <C>                    <C>
     2.75                                        5,550                     4                 2.75
     3.50                                       11,250                    62                 3.50
     3.75                                      340,000                    52                 3.75
     4.50                                      103,827                     4                 4.50
     10.00                                     160,000                     5                10.00
----------------------------------------------------------------------------------------------------
                                               620,627                                       5.47
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>

     [ii] PRO FORMA INFORMATION

     Adopting SFAS 123 would require the Company to estimate the fair value of
     any options granted and to reflect these amounts as compensation expense in
     determining net income for each year. In order to estimate the fair value
     of its options, the Company may use option pricing models which were
     developed for use in estimating the fair value of traded options which have
     no vesting restrictions and are fully transferable. Because the Company's
     employee stock options have characteristics significantly different from
     those options and because changes in subjective input assumptions can
     materially affect the fair value estimate, in management's opinion, the
     existing models do not necessarily provide a reliable single measure of the
     fair value of its employee stock options.

     However, as required by SFAS 123, pro forma information regarding net
     income and earnings per share has been determined as if the Company had
     accounted for its employee stock options under the fair value method. The
     fair value for these options was estimated at the date of grant using a
     Black-Scholes option pricing model with the following weighted average
     assumptions for 2000: risk-free interest rates of 4.94% [1999 - 5.39%; 1998
     - 5.36%]; dividend yields of nil [1999 - nil; 1998 - nil]; volatility
     factors of the expected market price of the Company's common stock of 0.690
     [1999 - 0.920; 1998 - 0.944], and an expected life of the options ranging
     from one to five years [1999 - one to five years; 1998 - one to three
     years]. For purposes of pro forma disclosures, the estimated fair value of
     the options is expensed immediately.


                                                                             12
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998




     The Company's pro forma net income (loss) and earnings (loss) per share
     following SFAS 123 are as follows:

<TABLE>
<CAPTION>

                                                        2000              1999               1998
                                                          $                 $                  $
----------------------------------------------------------------------------------------------------
<S>                                                  <C>               <C>                <C>
     Pro forma net income (loss)                     917,250           (35,974)           297,184
     Pro forma earnings (loss) per common share
       Basic                                            0.30            (0.01)               0.10
       Diluted                                          0.30            (0.01)               0.10
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>


11.  VETERINARY LABORATORIES INC.

[a]  PURCHASE OBLIGATION TO CONTIGROUP COMPANIES, INC. [FORMERLY CONTINENTAL
     GRAIN COMPANY]

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

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

     In exchange for the Company reattributing net operating loss carryforwards
     of approximately $5,000,000 [carrying value of nil] which existed in Vet
     Labs at the time of acquisition by the Company and the Company assuming the
     purchase obligation of the Major Shareholder, CGC reduced the maximum
     repurchase obligation of the Company for CGC's remaining 149,899 common
     shares from approximately $3,100,000 at November 22, 1996 to $2,000,000. In
     addition, the deadline for CGC to exercise its option for the sale of
     common shares to the Company was extended from November 30, 1996 to May 30,
     1999.


                                                                             13
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998




     On December 23, 1998, the terms of the purchase agreement were revised
     whereby the deadline for CGC to exercise its option for the sale of common
     shares to the Company was extended from May 30, 1999 to March 15, 2002. In
     addition, the Company agreed to make payments against the outstanding
     repurchase obligation of $50,000 on each of May 1, 1999 and November 1,
     1999 and payments of $75,000 on each of May 1, 2000, November 1, 2000, May
     1, 2001 and November 1, 2001.

     During the year ended January 31, 2000, CGC disposed of all its
     shareholdings of the Company for a cash consideration of $443,390, and
     therefore, the remaining purchase obligation is no longer contingent on the
     share price of the Company. Accordingly, the fair value of the remaining
     purchase obligation has been reclassified from redeemable capital stock to
     long-term debt [NOTE 8].

     A continuity of this purchase obligation is as follows:

<TABLE>
<CAPTION>

                                                                               COMMON SHARES
                                                                           #                  $
---------------------------------------------------------------------------------------------------
<S>                                                                    <C>              <C>
     Balance at January 31, 1998                                       149,899          2,000,000

     Reduction of liability due to sale of common shares by CGC         56,000            571,267
---------------------------------------------------------------------------------------------------
     Balance at January 31, 1999                                        93,899          1,428,733

     Reduction of liability due to payments                                 --            100,000
     Reduction of liability due to sale of common shares by CGC         93,899            443,390
---------------------------------------------------------------------------------------------------
     Balance at January 31, 2000                                            --            885,343
     Fair value adjustment, representing imputed interest at 9%             --           (183,530)
---------------------------------------------------------------------------------------------------
     BALANCE AT JANUARY 31, 2000, FAIR VALUE                                --            701,813
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>

     Redeemable capital stock is presented as follows:

<TABLE>
<CAPTION>

                                                                          2000               1999
                                                                            $                  $
---------------------------------------------------------------------------------------------------
<S>                                                                       <C>            <C>
     Current portion of mandatorily redeemable capital stock                 --            100,000
     Mandatorily redeemable capital stock                                    --            300,000
     Redeemable capital stock                                                --          1,028,733
---------------------------------------------------------------------------------------------------
                                                                             --          1,428,733
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>


                                                                             14
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998





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

     In 1992, Vet Labs and Sparhawk entered into a joint venture [collectively
     referred to as the "Joint Venture"] for the purpose of manufacturing and
     selling veterinary pharmaceutical products. Sparhawk is an affiliated
     company owned primarily by the management of the Joint Venture. The Company
     controls the Joint Venture through its control of the Board of Directors.
     The Company has funded the Joint Venture's losses since 1992 and,
     accordingly, has recorded 100% of these losses in the consolidated
     financial statements. As at January 31, 2000, future profits of
     approximately $1,200,000 will accrue to the Company until Sparhawk's share
     of losses since 1992 has been recovered. Subsequent income will be
     allocated 50% to Vet Labs and 50% to Sparhawk.

12.  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:

<TABLE>
<CAPTION>

                                                              2000            1999           1998
                                                                $               $              $
----------------------------------------------------------------------------------------------------
<S>                                                        <C>            <C>            <C>
Research and development expenditures                      677,111         234,825        213,988
Investment tax credits                                     (39,794)       (201,762)       (29,087)
----------------------------------------------------------------------------------------------------
RESEARCH AND DEVELOPMENT EXPENSE                           637,317          33,063        184,901
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>

[a]  IRON DEXTRAN PROCESS

     Effective February 1, 1995, the Company entered into an agreement with
     Novadex Corp., whereby Novadex Corp. granted the Company the exclusive
     worldwide license to use a certain process developed by Novadex Corp. for
     producing Iron Dextran. The term of this license agreement is 10 years. The
     Company pays a license fee based on production volumes. The total royalty
     expense incurred during the year was $55,915 [1999 - $63,897; 1998 -
     $71,088].

     During July 1999, Novadex Corp. was liquidated [NOTE 6]. All assets and
     liabilities of Novadex Corp. were assumed by the Major Shareholder. This
     license agreement was included in the assets assumed by the Major
     Shareholder. The Company will now pay this license fee to the Major
     Shareholder. These payments will be applied to the balance owing by the
     Major Shareholder.


                                                                             15
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998


                                                                             16
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998




[b]  CYSTIC FIBROSIS

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

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

     Costs incurred during the year in relation to the Agreement totalled $1,378
     [1999 - $11,268; 1998 - $71,338].

     During the year, the Company, through Polydex B.C., licensed the products
     to SYNSORB Biotech Ltd. ["SYNSORB"], a Canadian-based pharmaceutical
     company dedicated to drug development and manufacturing. Under this license
     agreement, SYNSORB agrees to fund the research and development under the
     Agreement in exchange for an exclusive license to market the resulting
     products. SYNSORB will pay a semi-annual royalty payment to both UBC and
     Polydex B.C. based on revenue from product sales.

     Subsequent to entering into the license agreement with SYNSORB, SYNSORB
     assigned the license agreement to BCY Ventures of Vancouver, British
     Columbia. BCY Ventures has assumed all obligations to fund continuing
     research and development of this project in return for an exclusive license
     to market the resulting products.

     It is expected that the Company will enter into a supply agreement to
     produce the active pharmaceutical ingredient for the final products once
     clinical testing is complete and the final products reach market.


                                                                             17
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998




13.  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 and minority interest
     are as follows:

<TABLE>
<CAPTION>

                                                              2000            1999           1998
                                                                $               $              $
----------------------------------------------------------------------------------------------------
<S>                                                       <C>            <C>          <C>
     Bahamas                                              (433,521)       (579,880)    (1,654,659)
     Canada                                                672,301       1,322,937      1,247,816
     United States                                         603,615         475,061        (42,219)
----------------------------------------------------------------------------------------------------
                                                           842,395       1,218,118       (449,062)
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>

     The provision for (recovery of) income taxes consists of the following:

<TABLE>
<CAPTION>

                                                              2000            1999           1998
                                                                $               $              $
----------------------------------------------------------------------------------------------------
<S>                                                        <C>             <C>           <C>
     Provision for income taxes based on Bahamian income        --              --              --
     Foreign withholding taxes on Bahamian income            1,912          24,222              --
----------------------------------------------------------------------------------------------------
                                                             1,912          24,222              --
----------------------------------------------------------------------------------------------------

     Provision for income taxes based on Canadian
       statutory income tax rates                          270,640         621,503         570,484
     Benefit of previously unrecorded Canadian tax items        --              --        (556,526)
----------------------------------------------------------------------------------------------------
     Reduction in valuation allowance                           --              --        (950,000)
----------------------------------------------------------------------------------------------------
                                                           270,640         621,503        (936,042)
----------------------------------------------------------------------------------------------------

     Provision for (recovery of) income taxes based on
       United States income tax rates                      107,728          47,827         (16,888)
     Benefit of previously unrecorded United States tax
       items                                              (107,728)        (47,827)             --
     Reduction in valuation allowance                     (400,000)              --             --
     United States losses not recognized                        --               --         16,888
----------------------------------------------------------------------------------------------------
     PROVISION FOR (RECOVERY OF) INCOME TAXES             (127,448)         645,725       (936,042)
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>


                                                                             18
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998



                                                                             19

<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998



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

<TABLE>
<CAPTION>

                                                              2000            1999           1998
                                                                $               $              $
----------------------------------------------------------------------------------------------------
<S>                                                       <C>             <C>             <C>
     Canadian deferred tax recovery                        113,983         232,704        950,000
     Canadian deferred tax expense                        (203,040)       (595,829)       (13,958)
     Canadian current tax expense                         (181,583)       (258,378)            --
     United States deferred tax recovery                   400,000              --             --
     Bahamian foreign withholding tax expense               (1,912)        (24,222)            --
----------------------------------------------------------------------------------------------------
                                                           127,448        (645,725)       936,042
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>

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

<TABLE>
<CAPTION>

                                                              2000            1999           1998
                                                                $               $              $
----------------------------------------------------------------------------------------------------
<S>                                                      <C>             <C>            <C>
     Canadian
       Unclaimed research and development expenses         730,000         749,000        923,000
       Investment tax credits                                   --          58,000        194,000
       Amortization of property, plant and equipment which
         has not yet been claimed for income tax purposes       --          64,000         48,000
       Non-capital losses                                       --              --        123,000
       Other items                                         173,000         183,000        143,000
     United States
       Net operating losses                                416,000         670,000        715,000
----------------------------------------------------------------------------------------------------
                                                         1,319,000       1,724,000      2,146,000
     Less valuation allowance                              173,000         948,000      1,196,000
----------------------------------------------------------------------------------------------------
     NET DEFERRED TAX ASSETS                             1,146,000         776,000        950,000
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>

     During the year ended January 31, 2000, as a result of the sustained
     profitability of the Company's U.S. operations and the resulting ability to
     utilize the Company's U.S. tax losses and after considering the
     expectations for continued profitability of the U.S. operations into the
     future, the Company determined that the valuation allowance should be
     reduced by $400,000.

     During the year ended January 31, 1998, as a result of the sustained
     profitability of the Company's Canadian operations and the resulting
     ability to utilize the Company's Canadian tax losses and deductions and
     after considering the expectations for continued profitability of


                                                                             20

<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998



     the Canadian operations into the future, the Company determined that the
     valuation allowance should be reduced by $950,000.


                                                                             21
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998




     Deferred tax liabilities of $274,960 at January 31, 2000 [1999 - $148,083]
     have been provided on temporary differences arising primarily from
     differences between the carrying amount for financial reporting purposes
     and the amounts used for income tax purposes for investment tax credits.

[c]  The Canadian subsidiaries have deductions available to reduce future years'
     income for tax purposes on account of net temporary differences resulting
     from expense items reported for income tax purposes in different periods
     than for financial statement purposes totalling approximately $2,500,000
     and $1,500,000 for federal and provincial purposes, respectively. Certain
     Canadian subsidiaries also have net capital losses available for
     carryforward of approximately $374,000 available to offset future taxable
     capital gains. These potential deductions and net capital losses have an
     indefinite carryforward period.

     The benefits associated with these losses, deductions and investment tax
     credits have been recorded in the consolidated financial statements to the
     extent described in note 13[b].

[d]  The U.S. subsidiaries of the Company have net operating loss carryforwards
     for income tax purposes of approximately $1,000,000 which expire from 2009
     to 2013.

     The benefits associated with these losses have been recorded in the
     consolidated financial statements to the extent described in note 13[b].

14. CONSOLIDATED STATEMENTS OF CASH FLOWS

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

<TABLE>
<CAPTION>

                                                        2000              1999               1998
                                                          $                 $                  $
----------------------------------------------------------------------------------------------------
<S>                                                 <C>               <C>                <C>
DECREASE (INCREASE) IN CURRENT ASSETS
Trade accounts receivable                           (200,474)          (72,465)           142,389
Inventories                                         (101,153)         (274,495)          (444,290)
Prepaid expenses and other current assets             52,288            59,688            (94,889)
----------------------------------------------------------------------------------------------------
                                                    (249,339)         (287,272)          (396,790)
INCREASE (DECREASE) IN CURRENT LIABILITIES
Accounts payable                                      67,045           208,628            (25,489)
Accrued liabilities                                  (20,833)          123,220            (74,665)
Income taxes payable                                 (36,121)           52,462                 --
----------------------------------------------------------------------------------------------------
                                                    (239,248)           97,038           (496,944)
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>


                                                                             22
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998






                                                                             23


<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998



Cash paid during the year for interest was $96,399 [1999 - $95,058; 1998 -
$82,536]. Cash paid during the year for income taxes was $103,843 [1999 -
$1,142; 1998 - nil].

Excluded from the consolidated statements of cash flows for the year ended
January 31, 2000 is the issuance of 5,000 common shares of the Company in
exchange for services rendered to the Company [NOTE 10].

Excluded from the consolidated statements of cash flows for the year ended
January 31, 1999 is the issuance of 20,000 common shares of the Company in
exchange for services rendered to the Company [NOTE 10].

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

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

15. SEGMENTED INFORMATION

All of the operations of the Company are carried on through Dextran in Canada
and through Chemdex in the United States. The operations of Chemdex represent
the veterinary products business and the operations are carried out through
its wholly-owned subsidiary, Vet Labs. Each of Dextran and Chemdex operates
as a strategic business unit offering different products. Each subsidiary
comprises a reportable segment as follows:

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

-    Veterinary products - manufactures and sells veterinary pharmaceutical
     products and specialty chemicals in the United States. The primary
     customers are distributors and private labelers, who in turn sell to the
     end-user of these products.

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
summary of significant accounting policies.


                                                                            24
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998




[a] The following is condensed segment financial information for the years ended
    January 31, 2000, 1999 and 1998:

<TABLE>
<CAPTION>

                                                                        2000
                                                   ------------------------------------------------
                                                                    VETERINARY
                                                     DEXTRAN         PRODUCTS               TOTAL
                                                       $                 $                     $
---------------------------------------------------------------------------------------------------
<S>                                                <C>              <C>                <C>
     Gross sales                                   4,753,007         8,820,977         13,573,984
     Intercompany sales                              477,535                --            477,535
     Interest expense                                 62,770            33,629             96,399
     Depreciation and amortization                   273,216           231,002            504,218
     Income from operations                          659,994           684,655          1,344,649
     Interest income                                  38,837                --             38,837
     Segment assets                                6,169,810         4,426,197         10,596,007
     Capital expenditures                          1,194,869           114,570          1,309,439
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>

                                                                        1999
                                                   ------------------------------------------------
                                                                    VETERINARY
                                                     DEXTRAN         PRODUCTS               TOTAL
                                                       $                 $                     $
---------------------------------------------------------------------------------------------------
<S>                                                <C>              <C>                <C>
     Gross sales                                   4,688,490         7,712,966         12,401,456
     Intercompany sales                              680,436                --            680,436
     Interest expense                                 52,070            42,988             95,058
     Depreciation and amortization                   198,967           277,854            476,821
     Income from operations                        1,394,289           668,397          2,062,686
     Interest income                                  19,726                --             19,726
     Segment assets                                4,975,015         4,156,641          9,131,656
     Capital expenditures                            855,257           115,617            970,874
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>

                                                                        1998
                                                  -------------------------------------------------
                                                                    VETERINARY
                                                     DEXTRAN         PRODUCTS               TOTAL
                                                       $                 $                     $
---------------------------------------------------------------------------------------------------
<S>                                                <C>              <C>                <C>
     Gross sales                                   4,587,224         5,931,781         10,519,005
     Intercompany sales                              676,640                --            676,640
     Interest expense                                 38,557            43,874             82,431
     Depreciation and amortization                   220,094           237,266            457,360
     Income from operations                        1,232,846           (39,437)         1,193,409
     Interest income                                  32,004                --             32,004
     Segment assets                                4,298,053         3,954,651          8,252,704
</TABLE>


                                                                            25
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998



<TABLE>
<S>                                                  <C>               <C>               <C>
     Capital expenditures                            270,095           131,320            401,415
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>


                                                                            26
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998




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

<TABLE>
<CAPTION>
                                                        2000              1999               1998
                                                          $                 $                  $
----------------------------------------------------------------------------------------------------
<S>                                               <C>               <C>                <C>
     GROSS SALES
     Gross sales from segments                    13,573,984        12,401,456         10,519,005
     Intercompany sales elimination                 (477,535)         (680,436)          (676,640)
----------------------------------------------------------------------------------------------------
                                                  13,096,449        11,721,020          9,842,365
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                        2000              1999               1998
                                                          $                 $                  $
----------------------------------------------------------------------------------------------------
<S>                                                <C>               <C>               <C>
     INCOME (LOSS) BEFORE INCOME TAXES AND
       MINORITY INTEREST
     Operating income from segments                1,344,649         2,062,686          1,193,409
     Unallocated corporate expenses                 (742,686)         (917,912)        (1,091,790)
     Write-down of patents                                --                --           (608,994)
     Interest and other income                       240,432            73,344             58,313
----------------------------------------------------------------------------------------------------
                                                     842,395         1,218,118           (449,062)
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                          2000               1999
                                                                            $                  $
----------------------------------------------------------------------------------------------------
<S>                                                                 <C>                 <C>
     ASSETS
     Segment assets                                                 10,596,007          9,131,656
     Corporate assets                                                1,422,349          1,324,608
----------------------------------------------------------------------------------------------------
                                                                    12,018,356         10,456,264
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                          2000
                                                   -----------------------------------------------
                                                     TOTAL                           CONSOLIDATED
                                                    SEGMENTS          CORPORATE        TOTALS
                                                       $                  $               $
--------------------------------------------------------------------------------------------------
<S>                                                 <C>               <C>            <C>
     OTHER SIGNIFICANT ITEMS
     Interest expense                                 96,399            51,589            147,988
     Depreciation and amortization                   504,218            15,582            519,800
     Interest income                                  38,837               592             39,429
</TABLE>


                                                                            27
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998

<TABLE>
<S>                                                <C>               <C>            <C>

     Capital expenditures                          1,309,439             9,187          1,318,626
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
</TABLE>


                                                                            28
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>
                                                                          1999
                                                    ----------------------------------------------
                                                     TOTAL                           CONSOLIDATED
                                                    SEGMENTS          CORPORATE        TOTALS
                                                       $                  $               $
--------------------------------------------------------------------------------------------------
<S>                                                <C>                <C>            <C>
     OTHER SIGNIFICANT ITEMS
     Interest expense                                 95,058            50,219            145,277
     Depreciation and amortization                   476,821            37,618            514,439
     Interest income                                  19,726            27,345             47,071
     Capital expenditures                            970,874             5,362            976,236
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                          1998
                                                   -----------------------------------------------
                                                     TOTAL                           CONSOLIDATED
                                                    SEGMENTS          CORPORATE        TOTALS
                                                       $                  $               $
--------------------------------------------------------------------------------------------------
<S>                                                <C>               <C>             <C>
     OTHER SIGNIFICANT ITEMS
     Interest expense                                 82,431            46,768            129,199
     Depreciation and amortization                   457,360           109,282            566,642
     Interest income                                  32,004            22,074             54,078
     Capital expenditures                            401,415            54,667            456,082
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
</TABLE>

[c] Consolidated sales by destination are as follows:

<TABLE>
<CAPTION>
                                                        2000              1999               1998
                                                          $                 $                  $
--------------------------------------------------------------------------------------------------
<S>                                               <C>               <C>                <C>
     United States                                 9,556,972         8,321,738          6,477,247
     Canada                                          688,883           593,836            699,539
     Europe                                        1,689,738         1,621,951          1,574,569
     Pacific Rim                                     745,861         1,039,627            912,530
     Other                                           414,995           143,868            178,480
--------------------------------------------------------------------------------------------------
                                                  13,096,449        11,721,020          9,842,365
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
</TABLE>


                                                                            29
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998



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

<TABLE>
<CAPTION>
                                                                         2000                1999
                                                                           $                   $
---------------------------------------------------------------------------------------------------
<S>                                                                  <C>                <C>
     United States                                                   1,991,434          2,107,865
     Canada                                                          3,244,844          2,213,621
     Bahamas                                                            71,666             78,062
---------------------------------------------------------------------------------------------------
                                                                     5,307,944          4,399,548
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>

[e]  For the year ended January 31, 2000, the veterinary products industry
     segment has three [1999 - three] customers that each account for more than
     10% of the Company's total revenue. These three customers combined
     accounted for approximately $5,016,000 [1999 - $4,323,000] of the Company's
     total revenue.

16. 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, trade accounts receivable, accounts payable and
accrued liabilities approximate their fair values at January 31, 2000 because
of the short maturities of these financial instruments.

The estimated fair values of the amounts due from Novadex Corp., due from and
to shareholders, long-term debt and other long-term liabilities are not
materially different from the carrying values for financial statement
purposes at January 31, 2000 and 1999.

17. CONCENTRATION OF ACCOUNTS RECEIVABLE

At January 31, 2000, there were two [1999 - two] customers of the Company
which comprised 28% [1999 - 26%] 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.


                                                                            30
<PAGE>

POLYDEX PHARMACEUTICALS LIMITED

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


January 31, 2000, 1999 and 1998



18. NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ["SFAS 133"], "Accounting for Derivative Instruments and Hedging
Activities", as amended by Statement No. 137, which is effective for fiscal
years beginning after June 15, 2000. SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability, measured at its fair
value. SFAS 133 also requires that changes in the derivative's fair value be
recognized currently in income unless specific hedge accounting criteria are
met. Adoption of this standard is not expected to have a material impact on
the financial position or results of operations of the Company.

19. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS

The comparative consolidated financial statements have been reclassified from
statements previously presented to conform to the presentation of the 2000
consolidated financial statements.



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