United
States 
Securities and Exchange CommissionWASHINGTON, D.C. 20549

FORM 10-K(Mark One)

Q

or

£Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 
For the transition period from ___________to ___________

Commission file number 1-8366

POLYDEX PHARMACEUTICALS LIMITED

|Commonwealth of the Bahamas                                        | None                                
|------------------------------------------------------------------ | ------------------------------------
|(State or other jurisdiction of
    incorporation or organization) | (I.R.S. Employer Identification No.)
|                                                                   |                                     

|                                                    |               
|--------------------------------------------------- | --------------
|421 Comstock Road, Toronto, Ontario, Canada MIL 2H5 | (416) 755-2231
|(Address of principal executive offices)            | Telephone No. 

Securities Registered Pursuant to Section 12(b) of the Act:

|Title of each class                            | Name of each exchange which registered
|---------------------------------------------- | --------------------------------------
|Common Shares, par value $0.0167 per
    share | NASDAQ
    Capital Market             

Securities Registered Pursuant to Section
12(g) of the Act:None

Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    
Yes

Indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    
Yes
£NoQ

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.     
YesQNo
£

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



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Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definition of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check
one):

|Large accelerated filer | £ | Accelerated filer         | £
|----------------------- | - | ------------------------- | -
|Non-accelerated filer   | £ | Smaller reporting company | Q

Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Act). Yes

The aggregate market value of the voting and non-voting
common equity held by non-affiliates, computed by reference to the price at
which the common equity was last sold or the average bid and asked price of such
common equity, as of the last business day of the registrant's most recently
completed second fiscal quarter was $ 4,137,069. There were 3,072,846 common
shares outstanding as of March 31, 2008.

DOCUMENTS INCORPORATED BY REFERENCE

The definitive proxy statement relating to the registrant's
Annual Meeting of Stockholders, to be held on July 11, 2008, is incorporated by
reference in Part III to the extent described therein.





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|                               
|-------------------------------
|POLYDEX PHARMACEUTICALS LIMITED
|                               
|TABLE OF CONTENTS              
|                               
|                               
|                               
|                               
|PART I                         
|Item 1.                        
|Item 1A.                       
|Item 1B.                       
|Item 2.                        
|Item 3.                        
|Item 4.                        
|                               
|PART II                        
|Item 5.                        
|Item 6.                        
|Item 7.                        
|Item 7A.                       
|Item 8.                        
|Item 9.                        
|Item 9A.                       
|Item 9B.                       
|PART III                       
|Item 10.                       
|Item 11.                       
|Item 12.                       
|Item 13.                       
|Item 14.                       
|                               
|PART IV                        
|Item 15.                       
|SIGNATURES                     
|                               

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Cautionary Note Regarding Forward-Looking Statements

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





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PART I

ITEM 1.BUSINESS

Introduction

Polydex Pharmaceuticals Limited (the
"Company") is engaged in the research, development, manufacture and marketing of
biotechnology-based products for the human pharmaceutical market, and also
manufactures bulk pharmaceutical intermediates for the worldwide veterinary
pharmaceutical industry.

The Company focuses on the
manufacture and sale of Dextran and derivative products, including Iron Dextran
and Dextran Sulphate, and other specialty chemicals. Dextran, a generic name
applied to certain synthetic compounds formed by bacterial growth on sucrose, is
a polymer or giant molecule. The name Polydex combines the words "polymer" and "dextran."
The Company was incorporated under the laws of the Commonwealth of the Bahamas
on June 14, 1979 as Polydex Chemicals Limited, and changed its name on March 28,
1984.

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

Products and Sales

Iron Dextran

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

Dextran Sulphate

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

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Patents, Trademarks and Licenses

Cellulose Sulphate

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

During fiscal year ended January 31,
2001, a patent bearing U.S. patent number 6,063,773 was issued to the Company
and co-inventors entitled "Cellulose Sulphate for use as Antimicrobial and
Contraceptive Agent". Various clinical trials with respect to the safety and
efficacy of this product have been completed.

During fiscal year ended January 31,
2006, a patent bearing European Patent No. 1296691 entitled "Cellulose Sulfate
and Other Sulfated Polysaccharides to Prevent and Treat Papilloma Virus and
Other Infections" was issued. This patent is effective in the following
countries: France, Germany, United Kingdom, Austria, Belgium, Switzerland,
Denmark, Spain, Finland, Greece, Ireland, Italy, Netherlands, Portugal, Sweden,
Turkey and Hong Kong. This patent is directed to treating, inhibiting and
preventing papilloma virus infections using sulfated polysaccharides.

Low Molecular Weight Dextran

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

Iron Dextran

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

Dextran Sulphate

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

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Dextran Products

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

The Company is dependent upon a
single source for a certain raw material used in the production of Dextran
Sulphate. Such supply was adequate in fiscal year 2008, and no shortages are
anticipated in the near term. However, any curtailment in availability of such
raw material could be accompanied by production or other delays as well as
increased raw material costs, with consequent adverse effect on the Company's
results of operations. The Company has no long-term contracts with any of its
suppliers.

Order Book and Seasonality

The Company's order book as at
January 31, 2008 was consistent with the orders on hand for January 31, 2007.
All of these orders are expected to be filled within the current fiscal year.
The Company's bulk pharmaceutical intermediate business has become less seasonal
with the sale of the Veterinary Laboratories Inc. ("Vet Labs") business in
Kansas City to Sparhawk in March 2004. The bulk product sold by Dextran Products
is primarily targeted to the swine industry where modern animal husbandry
techniques maintain most animals indoors. Certain producers in less developed
countries may raise animals outdoors thereby reducing the amount of product
required but such markets are small and decreasing in size as they modernize.
Therefore the Company does not believe that such seasonality is material to its
financial results as a whole. The Company's sale of Dextran Sulphate is not
subject to seasonality.

Competition

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

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

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

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Environmental Compliance

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

Employees

As of March 31, 2008, the Company
employed 23 employees, of whom 14 were engaged in production, 6 in quality
control, 2 in administration and 1 in marketing and sales activities. None of
the Company's employees is covered by collective bargaining agreements.
Management considers its relations with employees to be good.

Research and Development

During the fiscal years ended January
31, 2008, 2007 and 2006, the Company expended $135,821, $214,865 and $215,482
respectively, on research and development, primarily relating to the development
of Cellulose Sulphate. Research and development expenditures are a result of
additional product development activities performed by the Company and funded
outside of its partnership relationships. During the fiscal years ended January
31, 2008 and 2007, the Company did not recognize any investment tax credit
benefits (2006-$9,681).

Cellulose Sulphate (Ushercell)

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

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

On January 31, 2007, the Independent
Review Board in conjunction with CONRAD, WHO, FHI and Polydex announced the
halting of Two Phase III clinical trials to assess the effect of Ushercell on
vaginal HIV acquisition which had been started in six clinical trial sites
located in India and Africa. The trials were halted due to a possible higher
than expected incidence of HIV. An investigation is now underway to determine
the cause, with a report due towards the end of fiscal year 2009.

Low Molecular Weight Dextran

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

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

Segmented Information

The information regarding the
geographic distribution of revenue and revenue by significant customer is set
forth in Note 16 to the Company's Consolidated Financial Statements for the
fiscal year ended January 31, 2008 under Item 8 Financial Statements and
Supplementary Data.

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ITEM 1A.     RISK FACTORS

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

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

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

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

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



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

- the product is
  uneconomical or if the market for the product does not develop or diminishes;
- the Company is not
  able to enter into arrangements or collaborations to commercialize and/or
  market the product;
- the product is not
  eligible for third-party reimbursement from government or private insurers;
- others hold
  proprietary rights that preclude the Company from commercializing the product;
- others have
  brought to market similar or superior products;
- others have
  superior resources to market similar products or technologies;
- government
  regulation imposes limitations on the indicated uses of the product, or later
  discovery of previously unknown problems with the product results in added
  restrictions on the product or results in the product being withdrawn from the
  market; and/or

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

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

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

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

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

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

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

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

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

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

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

If the Company is delisted from The
NASDAQ Capital Market, it would seriously impair the liquidity of our common
shares and limit our ability to raise capital.

The Company's common stock trades on
The NASDAQ Capital Market, which has certain compliance requirements for
continued listing of common stock, including a series of financial tests
relating to shareholder equity, public float, number of market makers and
shareholders, and maintaining a minimum bid price per share for the Company's
common stock.

In January of 2008, the Company
received a NASDAQ Staff Deficiency Letter from The NASDAQ Stock Market notifying
it that the Company's bid price per share for its common shares had closed below
the $1.00 minimum bid price for 30 consecutive business days. As a result, the
Company no longer meets the requirements of Marketplace Rule 4310(c)(4) for
continued listing on The NASDAQ Capital Market and has 180 calendar days, or
until July 14, 2008, to regain compliance. To regain compliance, the Company's
closing bid price for its common shares must remain at or above $1.00 for a
minimum of 10 consecutive business days prior to the end of the 180 calendar day
period. If the Company does not regain compliance by the end of the compliance
period (or any extension thereof) and chooses not to appeal the decision of The
NASDAQ Stock Market to delist its common shares, the Company's common shares
will be delisted from The NASDAQ Capital Market.

If we are delisted from The NASDAQ
Capital Market, our common shares would likely trade on the over-the-counter
bulletin board, commonly referred to as the "pink sheets". This alternative is
generally considered to be a less efficient market and would seriously impair
the liquidity of our common shares and limit our potential to raise future
capital through the sale of our common shares. This, in turn, would likely have
a material adverse effect on the price of our common shares.

ITEM 1B.     UNRESOLVED STAFF COMMENTS

None

ITEM 2.        PROPERTIES

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

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

Continuing in fiscal year 2008,
management proceeded with expansion of the Company's facility and modernization
of its powder-producing equipment in Toronto in order to increase production
capacity and also improve quality for a significant portion of the Company's
powdered products. The Company had embarked upon a major plant refurbishment
project that included the purchase and installation of more modern drying
equipment with increased throughput. Engineers prepared drawings and permits
were issued, allowing construction of a new drying facility to begin in the
fourth quarter of fiscal year 2007. The actual drying equipment is now installed
and is expected to be operational in the second quarter of fiscal year 2009. It
is expected that improved quality of the finished product will result in new
markets becoming available.

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ITEM 3.     LEGAL PROCEEDINGS

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

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

No matters were submitted to a vote
of security holders, through the solicitation of proxies or otherwise, during
the Company's fourth fiscal quarter ended January 31, 2008.

PART II

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

The principal market for the
Company's common shares is the NASDAQ Capital Market. The Company's common
shares trade under the symbol "POLXF."

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

|Fiscal Year 2008      |        |     
|--------------------- | ------ | ----
|fiscal quarter ended: | High   | Low 
|April 30, 2007        | $3.01  | 1.90
|July 31, 2007         | 2.17   | 1.53
|October 31, 2007      | 1.86   | 1.18
|January 31, 2008      | 1.35   | 0.53
|                      |        |     
|Fiscal Year 2007      |        |     
|fiscal quarter ended: | High   | Low 
|April 30, 2006        | $10.43 | 7.03
|July 31, 2006         | 10.50  | 8.55
|October 31, 2006      | 9.30   | 6.81
|January 31, 2007      | 8.00   | 2.61

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

As of April 23, 2008 there were
approximately 347 holders of record of the Company's common shares.

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

The Company did not sell any
unregistered common shares during the fiscal year ended January 31, 2008, did
not make any repurchases of its common shares and does not currently have a plan
to repurchase any of its common shares.

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ITEM 6.     SELECTED FINANCIAL DATA

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

|                                             | Fiscal year ended January 31,
|-------------------------------------------- | -----------------------------
|                                             | 2008                         
|Sales from continuing operations             | 5,734,858                    
|Net income (loss) from continuing operations | (885,211)                    
|Net income (loss) per common share           | (0.29)                       
|Total assets                                 | 9,763,270                    
|Long-term borrowings                         | 1,033,843                    





13

---



ITEM 7.

The Company's fiscal year ends on
January 31stof each year. In this report, fiscal year 2008 refers to
the Company's fiscal year ended January 31, 2008. The following discussion
should be read in conjunction with the financial statements and notes thereto
included elsewhere in this report. The Company's financial statements are
prepared in accordance with United States generally accepted accounting
principles. All amounts are in United States dollars, unless otherwise denoted.
This discussion contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. For a discussion
of risks, uncertainties and other factors that could cause actual results to
differ materially from those expressed in, or implied by the forward-looking
statements, see the discussion of Risk Factors and "Cautionary Note Regarding
Forward-Looking Statements" above.

Overview

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

Dextran Products Business

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

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

Ushercell is a high molecular weight
Cellulose Sulphate that was envisioned for topical vaginal use primarily in the
prevention of unplanned pregnancies, as well as the transmission of AIDS and
other sexually transmitted diseases. On January 31, 2007, the Company announced
that trials, originally intended to evaluate various aspects of the use of
Cellulose Sulphate as a contraceptive gel with antiviral capabilities, were
being halted due to a possible increase in transmission of HIV. Announcements
were prepared and distributed in conjunction with CONRAD and other agencies
which were involved with the trials. A full investigation is now underway as to
the potential cause and to determine exactly what occurred. The final report is
expected towards the end of fiscal year 2009. Until the report is available, it
is impossible to plan future developments of this product for any of the
indications that have been identified to date. The Company had never received
any financial gain from this project, and as a result, there is no immediate or
direct effect on sales or revenues.

14

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Chemdex, Vet Labs and the Joint
Venture Business

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

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



15

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Results of Operations



|                  |             |             |               | Fiscal Years           
|----------------- | ----------- | ----------- | ------------- | -----------------------
|                  | FY 2008     | FY 2007     | FY 2006       | 08 v 07                
|                  |             |             |               | (% increase (decrease))
|Loss before taxes | $ (967,155) | $ (375,818) | $ (1,308,296) | (157)%                 
|Net Loss          | (885,211)   | (260,623)   | (1,489,053)   | (240)%                 
|Loss per share    | (0.29)      | (0.09)      | (0.49)        |                        

The increase in net loss for the
fiscal year 2008 as compared to fiscal year 2007 is due primarily to the rise of
the Canadian dollar relative to the United States dollar and the significant
portion of Company expenses that are denominated in Canadian dollars. Because
the majority of the Company's revenue is denominated in United States dollars
while the majority of its cost of sales is denominated in Canadian dollars, at
its Dextran Products subsidiary, when the value of the Canadian dollar increases
in relation to the United States dollar, margins decrease and expenses increase.
Exchange rate fluctuations resulted in a 13% decrease in margins at Dextran
Products in fiscal year 2008 compared to the previous fiscal year (4% decrease
in fiscal year 2007). The results for fiscal year 2007 also included the
recognition of the deferred gain on the promissory note related to the sale of
the veterinary products assets to Sparhawk (Note 13).

The reduction in net loss for the
fiscal year 2007 as compared to fiscal year 2006 is due to several factors,
including the increase in sales and gross margins, the decrease in expenses, and
the recognition of the deferred gain on the promissory note related to the sale
of the veterinary products assets to Sparhawk (Note 13). These gains were
partially offset by the poor margins in the fourth quarter of fiscal year 2007,
and the continued increase in value of the Canadian dollar relative to the
United States dollar, which negatively affected gross margins at Dextran
Products.

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

|      |            |            |            | Fiscal Years               
|----- | ---------- | ---------- | ---------- | ---------------------------
|      | FY 2008    | FY 2007    | FY 2006    | 08 v 07                    
|      |            |            |            | (%
    increase (decrease))
|Sales | $5,734,858 | $6,499,287 | $5,265,209 | (12)%                      

Sales decreased in fiscal year 2008
as a result of decreased demand from existing customers and production problems
which primarily affected our powdered products. Lower customer demand, primarily
related to our lower margin products, resulted from overall selling price
increases, which in turn were necessitated by the increase in value of the
Canadian dollar relative to the United States dollar. Total production volume in
fiscal year 2008 decreased by 31% compared to fiscal year 2007.

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

|                    |          |          |          | Fiscal Years               
|------------------- | -------- | -------- | -------- | ---------------------------
|                    | FY 2008  | FY 2007  | FY 2006  | 08 v 07                    
|                    |          |          |          | (%
    increase (decrease))
|Gross profit        | $375,064 | $832,443 | $429,185 | (55)%                      
|Percentage of sales | 6.5%     | 13%      | 8%       |                            

The decrease in gross profit in
fiscal year 2008 is a result of the decrease in sales noted above, combined with
increased direct costs resulting from the increase in value of the Canadian
dollar. Significant cost savings were realized in almost all direct costs,
including payroll reductions of more than 10%, but these savings were not
sufficient to offset the effect of the exchange rate increase of the Canadian
dollar.

16

---



The increase in gross profit in
fiscal year 2007 was a result of the increase in sales due to price increases
and customer demand noted above, combined with ongoing control of direct costs
by management. Overall margins were negatively impacted during the fourth
quarter of fiscal year 2007 due to unusually large sales of lower margin
products to some major customers, combined with unexpected increases in
equipment repairs and utility costs.

|                                                            |            |            |            | Fiscal Years               
|----------------------------------------------------------- | ---------- | ---------- | ---------- | ---------------------------
|                                                            | FY 2008    | FY 2007    | FY 2006    | 08 v 07                    
|                                                            |            |            |            | (% increase
    (decrease))
|                                                            |            |            |            |                            
|Selling, promotion,
    general and administrative expenses | $1,211,172 | $1,376,960 | $1,550,735 | (12)%                      

In fiscal year 2008, management
continued its efforts to reduce overall selling, promotion and general and
administrative expenses. The most significant reductions occurred in
professional and reporting fees, insurance, legal fees, and options expense. The
Company also eliminated travel to various conferences that had been attended in
previous years that related to the Ushercell project.

In fiscal year 2007, management
reduced overall selling, promotion and general and administrative expenses.
While cost reductions were realized in the majority of general and
administrative areas, the most notable reductions occurred in outside
professional and reporting fees, insurance, and directors' expenses, though
options expense was higher than in fiscal year 2006. Offsetting these cost
savings was an increase in selling and promotion expenses. During fiscal year
2007, the Company attended several functions relating to the cellulose sulphate
project.

|                                     |          |          |          | Fiscal Years           
|------------------------------------ | -------- | -------- | -------- | -----------------------
|Research and development             | FY 2008  | FY 2007  | FY 2006  | 08 v 07                
|                                     |          |          |          | (% increase (decrease))
|Research and development             |          |          |          |                        
|Expenditures                         | $135,821 | $214,865 | $215,482 | (37)%                  
|Investment tax credits               |         |         | (9,681)  |                       
|Net research and development expense | $135,821 | $214,865 | $205,801 | (37)%                  

In fiscal year 2008, the Company
continued to reduce its research and development expenditures. Final payments
were made with respect to clinical studies related to the Ushercell project, and
a small amount was expended on process improvement projects related to the
Company's ongoing product lines. Patent fees have been reduced to the minimum
necessary to maintain only certain existing patent rights. It is expected that
the report from the Independent Review Board overseeing the Phase III Clinical
trials will be available in the third or fourth quarter of fiscal year 2009, at
which time a decision can be made on further activities.

In fiscal year 2007, the Company's
research and development expenditures were consistent with the level of
expenditures in fiscal year 2006. In fiscal year 2007, the majority of expenses
were relatively evenly split between patent work, and consultants working on
production process improvements, with some funds allocated to the bacterial
vaginosis trial. Almost all work has been halted on the project since the
Independent Review Board overseeing the Phase III Clinical Trials discovered
some inconsistent results and halted those trials.

17

---



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

|                                      |          |          |          | Fiscal Years               
|------------------------------------- | -------- | -------- | -------- | ---------------------------
|                                      | FY 2008  | FY 2007  | FY 2006  | 08 v 07                    
|                                      |          |          |          | (% increase
    (decrease))
|                                      |          |          |          |                            
|Depreciation and amortization expense | $559,866 | $547,297 | $543,023 | 2%                         

The increase in depreciation and
amortization in fiscal years 2008, 2007 and 2006 is due primarily to the
increased investments in capital equipment during the year, and the increase in
the value of the Canadian dollar relative to the United States dollar. Included
in the depreciation and amortization expense above are allocations to cost of
goods sold in the amount of $519,787 for fiscal year 2008 (2007 - $505,111; 2006
- $481,863).

|                 |         |         |         | Fiscal Years               
|---------------- | ------- | ------- | ------- | ---------------------------
|                 | FY 2008 | FY 2007 | FY 2006 | 08 v 07                    
|                 |         |         |         | (%
    increase (decrease))
|Interest expense | $96,818 | $94,790 | $81,509 | 2%                         

The increase in interest expense in
fiscal year 2008 is primarily attributable to the rise in the Canadian dollar
relative to the United States dollar. This is partially offset by the decrease
in other long-term debt and capital lease obligations.

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

|                                 |         |           |           | Fiscal Years           
|-------------------------------- | ------- | --------- | --------- | -----------------------
|                                 | FY 2008 | FY 2007   | FY 2006   | 08 v 07                
|                                 |         |           |           | (% increase (decrease))
|Foreign exchange
    loss (gain) | $43,256 | $(22,857) | $(18,139) | (289)%                 

In fiscal year 2008, the Company
experienced a foreign exchange loss due to Dextran Products' exposure to the
United States dollar, combined with the continued decline in value of the
Canadian dollar relative to the United States dollar. Throughout fiscal year
2008, Dextran Products generally had a net asset exposure to the United States
dollar because accounts receivable balances denominated in United States dollars
normally exceeded its United States dollar denominated intercompany payables.

In fiscal year 2007, the increase in
the foreign exchange gain was due primarily to Dextran Products' fluctuating
exposure to the United States dollar throughout the fiscal year, combined with
the continued increase in value of the Canadian dollar relative to the United
States dollar.

|                              |          |          |          | Fiscal Years               
|----------------------------- | -------- | -------- | -------- | ---------------------------
|                              | FY 2008  | FY 2007  | FY 2006  | 08 v 07                    
|                              |          |          |          | (%
    increase (decrease))
|Interest and other
    income | $184,821 | $497,663 | $148,166 | (63)%                      

18

---



The decrease in interest and other
income in fiscal year 2008 compared to fiscal year 2007 is due primarily to the
recognition of the deferred gain of $350,000 on the promissory note from
Sparhawk in fiscal year 2007, as explained above. Investment income decreased in
fiscal year 2008 as a result of the decrease in investments available for sale
and amounts included in cash equivalents, partially offset by the cash surrender
of a life insurance policy on a departed Company officer.

The increase in interest and other
income in fiscal year 2007 compared to fiscal year 2006 is due primarily to the
recognition of the deferred gain of $350,000 on the promissory note from
Sparhawk as explained above, as well as investment gains during the year.

|                         |           |            |          | Fiscal Years           
|------------------------ | --------- | ---------- | -------- | -----------------------
|                         | FY 2008   | FY 2007    | FY 2006  | 08 v 07                
|                         |           |            |          | (% increase (decrease))
|Tax provision (recovery) | $(81,944) | $(115,195) | $180,757 | (29)%                  

The fiscal year 2008 decrease in tax
provision is due to a decrease in deferred tax liabilities of $83,317, combined
with an increase in current tax expense of $1,373. The decrease in the deferred
tax liability is due to the decrease in the timing difference related to the
excess of carrying value of depreciable assets over tax value, which in turn
reduces future income tax liabilities.

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

Liquidity and Capital Resources

As of January 31, 2008, the Company
had cash and cash equivalents of $468,570, compared to $1,384,995 at January 31,
2007. In fiscal year 2008, the Company expended cash of $297,899 in its
operating activities, compared to generating $661,607 for fiscal year 2007 and
expending $425,185 for fiscal year 2006. The cash expended in operations in
fiscal year 2008 as compared to the cash generated in fiscal year 2007 is due to
the decrease in earnings. Depreciation and amortization continues to be a large
non-cash expense of the Company, which is expected to increase in fiscal year
2009 as result of assets acquired as part of the refurbishment become
operational.

Working capital decreased to
$2,403,042, but the current ratio increased to 3.43 to 1 as of January 31, 2008,
compared to $2,375,436 and 2.50 to 1 as of January 31, 2007.

Management expects the primary source
of its future capital needs will be a combination of existing cash and cash
equivalents, Company earnings and borrowings. As at January 31, 2008, the
Company had commitments of $20,024 for capital expenditures related to the plant
refurbishment at Dextran Products in Toronto.

At January 31, 2008, the Company had
accounts receivable of $611,975 and inventory of $1,350,490, compared to
$1,139,186 and $1,338,857, respectively, at January 31, 2007. The decrease in
accounts receivable at January 31, 2008 is due to the timing of payments and the
lower volume of sales in the fourth quarter compared to the same period in
fiscal year 2007. At January 31, 2008, the Company had accounts payable of
$399,820, compared to $1,213,518 at January 31, 2007. The decrease as at January
31, 2008 was due primarily to the timing of supplier payments, and lowered
production costs as a result of lower sales in the fourth quarter. In addition,
accrued liabilities at January 31, 2008 included costs related to the plant
refurbishment of $129,500. During fiscal year 2008, capital expenditures totaled
$1,486,866, as compared to $1,724,440 in fiscal year 2007. The majority of the
capital expenditures were for production equipment at the Dextran Products plant
in Toronto in both these fiscal years. Management intends to complete its
current plant refurbishment and expansion plan in the second quarter of fiscal
year 2009.

19

---



As at January 31, 2008, the Company's
investments consisted of fixed income short term money market mutual funds,
preferred share trust units, and fixed income and diversified mutual funds, all
denominated in Canadian dollars. Unrealized gains and losses will occur as the
market interest rates and investment valuations vary. Management does not expect
significant gains or losses in the future due to the relatively short term to
maturity of the debt-based money market funds, and the nature of the trust unit
and mutual funds. Management plans to convert a portion of these investments to
cash as needed for working capital or other cash needs such as plant
refurbishments and equipment.

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

Dextran Products had a Cdn. $750,000
(U.S. $636,000) (2007  Cdn. $750,000; U.S. $636,000) line of credit, of which
none was utilized at January 31, 2008 and 2007. This line of credit bears
interest at the Canadian banks' prime lending rate plus 0.75% (2007  6.00%;
2006  5.25%) and is repayable on demand. This indebtedness is collateralized by
a general security agreement over the Company's assets and a collateral mortgage
of Cdn. $500,000 on the Dextran Products building in Toronto. In March of 2006,
the Company secured an additional Cdn $500,000 fixed rate term loan primarily to
fund capital purchases, with interest at 0.75% over Canadian banks' prime
lending rate (2008  6.95%). Subsequent to the end of fiscal year 2008 the
Company received notice from its Canadian bank that it was in default of one of
its covenants, and that this covenant is to be met on a going forward basis. The
Company's operating line of credit was also temporarily reduced to Cdn. $250,000
(U.S. $249,053).

The decrease in capital lease
obligations during fiscal year 2008 was due to repayments on capital leases. The
balance for the two remaining capital leases is $12,805, and are expected to be
repaid in fiscal year 2009.

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

Changes in the relative values of the
Canadian dollar and the United States dollar occur from time to time and may, in
certain instances, materially affect the Company's results of operations.See Item 7A.

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

Management's plan to improve the Results of Operations.

As at January 31, 2008, there were
certain negative financial indicators reflected in our financial statements.
These include an accumulated deficit of $17,779,244, a loss of $ 885,211 for the
year and cash used in operations of $ 297,899.

The causes of these poor results are
due to extreme fluctuations in the value of the Canadian dollar versus the US
Dollar as previously discussed, but also the relatively low margin of the main
product base being Iron Dextran.

To offset these poor results the
Company has undertaken an active program to improve results with the following
activities:

New Drying Equipment.

For the past 5 years the Company has
experienced increase interest in its powdered products. Traditionally powdered
products have provided at least 25% gross margin.

20

---



The existing equipment was old and in
need of replacement and upgrading. As a result a new spray dryer was purchased
with the installation completed at the end of fiscal 2008. The site has been
visited by existing and new potential customers with positive feed back. The
cost of the renovations amounted to $3.4 million

Price adjustment.

Where possible prices have been
adjusted up. In certain cases unprofitable contracts have not been renewed
enabling the company to focus resources on those more profitable.

Production efficiencies.

The company has always operated as
carefully as possible but a greater emphasis has been placed on achieving
maximum batch yields while reducing the use of more costly raw materials and
negotiating even better prices on raw material supplies including utilities.

Overhead costs.

Significant savings have been
negotiated in head office expenses by minimizing the reliance on legal and audit
resources without jeopardizing the company's compliance with all regulations and
statutes.

Related Party Transactions

In August 1997, the Company loaned
Thomas C. Usher, formerly its Vice-Chairman, Director of Research and
Development, a member of its Board of Directors and the beneficial owner of
greater than 5% of the outstanding common shares of the Company, $691,500 at an
interest rate equal to the United States' bank prime rate plus 1.50% (the
"Loan"). The Loan was used to partially fund a $1,000,000 payment to the State
of Florida in order to allow Thomas C. Usher to regain possession of 430,000
Common Shares of the Company then held by the State as collateral security
relating to the liquidation of insurance companies formerly owned by Thomas C.
Usher. Repayment of the Loan is accomplished by periodic payments and through
offsets by the Company against royalty payments due Thomas C. Usher pursuant to
intellectual property license agreements and, in the past, bonus payments, if
any, granted to Thomas C. Usher as an employee of the Company. The amount
outstanding under the Loan as of January 31, 2008 was $297,321, as compared to
$306,827 at January 31, 2007, including accrued interest. The Company has taken
a cumulative provision of $323,490 against this loan and other amounts described
below as at January 31, 2008 (2007 - $323,490). Thomas C. Usher passed away on
February 26, 2005. Obligations with respect to the Loan transferred to the
estate of Thomas C. Usher. The Company continues to be obligated to make royalty
payments pursuant to the license agreements, and intends to continue to offset
such payments against the Loan.

In August 1999, Thomas C. Usher
personally assumed all of the assets and liabilities of Novadex Corp., including
the balance of receivables (the "Receivables") due to the Company from Novadex
Corp. The Receivables have no specific repayment terms. The total outstanding
amount of the Receivables as of January 31, 2008 was $60,339, as compared to
$130,619 at January 31, 2007. Thomas C. Usher also owed $250,000 to a subsidiary
of the Company, Novadex International Limited, as of January 31, 2008, pursuant
to a non-interest bearing loan with no specific repayment terms. The outstanding
amount of this loan has not changed from January 31, 2007. The amounts continue
to remain owing from the estate of Thomas C. Usher.

The estate of Thomas C. Usher has
pledged 270,763 common shares of the Company as security for these amounts owing
to the Company. These common shares had a market value of $213,902 at January
31, 2008, based on the closing price of the Company's common shares on the
NASDAQ Capital Market on January 31, 2008. The Company intends to continue to
hold the pledged assets as collateral until the amounts owing discussed above
are repaid.

The Company had a commitment to pay
an amount equal to one year's salary, $110,000, to Thomas C. Usher's estate. The
amount owing on this commitment as at January 31, 2008 is $36,908 (2007 -
$39,519).

The Company also has an outstanding
loan payable to Ruth Usher, a member of the Board of Directors until her
retirement on October 31, 2003, the beneficial owner of greater than 5% of the
outstanding common shares of the Company, a former director and the widow of
Thomas C. Usher. The amount due from the Company pursuant to this loan decreased
to $658,541 at January 31, 2008 from $679,309 at January 31, 2007 due to monthly
payments by the Company exceeding interest charges. The Company is required to
make blended monthly payments of $8,000 (2007 - $6,000).

21

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Off-Balance Sheet Arrangements

The Company has no off-balance sheet
arrangements.

Tabular Disclosure of Contractual Obligations

As of January 31, 2008, future
minimum cash payments due under contractual obligations, including, among
others, the Dextran Products line of credit, the loan payable to Ruth Usher, and
capital lease agreements, are as follows:

|                                    | Payment due by period
|----------------------------------- | ---------------------
|                                    |                      
|Contractual
    Obligations         | Total                
|Long-term debt
    obligations (1)  | $1,233,176           
|Capital lease
    obligations (2)   | 14,366               
|Operating lease
    obligations (3) | 214                  
|Purchase obligations                | 20,024               
|Revolving loans (4)                 |                     
|Total                               | $1,267,780           

1.

Consists of:

(a)

Note payable in
quarterly payments of Cdn. $419 maturing December 2009; and

(b)

Amounts due to
shareholder which bear interest at the Canadian banks' prime lending rate plus
1.5%, with required minimum monthly payments, including interest, of $8,000; and

(c)

Equipment
purchase term loan of Cdn $438,765 (US $437,104) repayable to a Canadian bank in
monthly payments of Cdn $5,792 including interest at 6.95%, maturing May 2011.

2.

Consists of
capital lease obligations foroffice
equipment of Cdn. $12,854 (US $12,805) repayable in quarterly installments,
bearing interest at 10.4% and maturing December 2009.

3.

Consists of
operating lease obligations for office equipment requiring quarterly payments of
Cdn. $72 (US $74) terminating December 2008.

4.

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

Critical Accounting Policies

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

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

22

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Revenue Recognition

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

Allowance for Doubtful Accounts

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

Long-Lived Assets

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

Deferred Tax Assets

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

Changes in Accounting Policies

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

Recent Accounting Pronouncements

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

23

---



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

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

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

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

In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities-Including an amendment of FASB Statement No.115. SFAS No. 159
permits entities to choose to measure many financial instruments and certain
other items at fair value. The objective is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions. SFAS No. 159 is effective
as of the beginning of an entity's first fiscal year that begins after November
15, 2007. The adoption of SFAS 159 does not have an impact on our consolidated
financial statements.

In December 2007, the FASB revised
SFAS No. 141, Business Combinations.SFAS No. 141 (revised 2007) improves
the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial reports about a
business combination and its effects. SFAS No. 141 (revised 2007) is effective
for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. Early application is not permitted before that date. As such, the
Company is required to adopt these provisions during the fiscal year ending
January 31, 2010. The Company is currently evaluating the impact of SFAS No. 141
(revised 2007) on its financial statements.

In December 2007, the FASB issued
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements 
an amendment of ARB No. 51. SFAS 160 improves the relevance, comparability,
and transparency of the financial information that a reporting entity provides
in its consolidated financial statements by establishing accounting and
reporting standards. SFAS No. 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008,
earlier adoption is prohibited. As such, the Company is required to adopt these
provisions at the beginning of the fiscal year ending January 31, 2010. The
Company is currently evaluating the impact of SFAS No. 160 on its financial
statements.

24

---



In March 2008, the FASB issued
Statement of Financial Accounting Standard No. 161, Disclosures about
Derivative Instruments and Hedging Activities  an amendment of FASB Statement
No. 133. SFAS No. 161 requires enhanced disclosures about an entity's
derivative and hedging activities and thereby improves the transparency of
financial reporting. SFAS No. 161 is effective for fiscal years, and interim
periods within those fiscal years, beginning after November 15, 2008, with early
adoption encouraged. As such, the Company is required to adopt these provisions
at the beginning of the fiscal year ended January 31, 2010. The Company is
currently evaluating the impact of SFAS No. 161 on its financial statements.

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Exchange Rate Sensitivity

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

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

|Expected Maturity Date     
|---------------------------
|                           
|                           
|                           
|Assets:                    
|Short-term
    investments:
|Fixed rate ($Cdn.)         
|Average interest rate      
|Marketable securities:     
|Fixed rate ($Cdn.)         
|Average interest rate      
|                           
|Liabilities:               
|Long-term debt:            
|Fixed rate ($Cdn.)         
|Average interest rate      
|                           

25

---



Interest Rate Sensitivity

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

|Expected Maturity Date     
|---------------------------
|                           
|                           
|                           
|Assets:                    
|Short-term
    investments:
|Fixed rate ($Cdn.)         
|Average interest rate      
|Marketable securities:     
|Fixed rate ($Cdn.)         
|Average interest rate      
|Notes receivable:          
|Variable rate ($US)        
|Average interest rate      
|                           
|Liabilities:               
|Long-term debt:            
|Fixed rate ($Cdn.)         
|Average interest rate      
|Variable rate ($US)        
|Average interest rate      

26

---



ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Polydex Pharmaceuticals Limited 
Quarterly Financial Highlights 
January 31, 2008

|                                                 | Fourth Quarter | Third Quarter | Second Quarter | First Quarter
|------------------------------------------------ | -------------- | ------------- | -------------- | -------------
|                                                 | Fiscal Year    | Fiscal Year   | Fiscal Year    | Fiscal Year  
|                                                 | 2008           | 2007          | 2008           | 2007         
|Sales
    from continuing operations             | 1,525,679      | 1,842,706     | 1,357,681      | 1,366,190    
|Gross
    profit                                 | (70,947)       | 72,472        | 137,947        | 208,536      
|Net
    income (loss) from continuing operations | (285,076)      | (132,304)     | (237,544)      | (147,981)    
|Net
    income (loss) per common share           | (0.10)         | (0.05)        | (0.08)         | (0.05)       





27

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the Shareholders of 
Polydex Pharmaceuticals Limited
We have audited the accompanying consolidated balance sheets
of Polydex Pharmaceuticals Limited as of January 31, 2008 and 2007 and the
related consolidated statements of shareholders' equity, operations and
comprehensive income (loss) and cash flows for each of the years in the
three-year period ended January 31, 2008. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about
whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the financial
position of Polydex Pharmaceuticals Limited as of January 31, 2008 and 2007, and
the consolidated results of its operations and its cash flows each of the years
in the three-year period ended January 31, 2008 in conformity with generally
accepted accounting principles in the United States of America.
Since the accompanying consolidated financial statements have
not been prepared in accordance with generally accepted accounting principles
and standards in Canada, they may not satisfy the reporting requirements of
Canadian statutes and regulations.
"SCHWARTZ LEVITSKY FELDMAN LLP"Toronto, Ontario, Canada
    Chartered AccountantsApril 17, 2008
    Licensed Public AccountantsF-1
POLYDEX PHARMACEUTICALS LIMITEDConsolidated Balance Sheets(Expressed in United States dollars)

|                                                            |   | January 31 |   | January 31
|----------------------------------------------------------- | - | ---------- | - | ----------
|                                                            |   | 2008       |   | 2007      
|                                                            |   |            |   |           
|Assets                                                      |   |            |   |           
|                                                            |   |            |   |           
|Current assets:                                             |   |            |   |           
|Cash and cash equivalents (note 3)                          | $ | 468,570    | $ | 1,384,995 
|Investments available for sale (note 7)                     |   | 845,034    |   | -         
|Trade accounts receivable (note 19)                         |   | 611,975    |   | 1,139,186 
|(Allowance for doubtful accounts nil, 2007 nil)             |   |            |   |           
|Inventories (note 4)                                        |   | 1,350,490  |   | 1,338,857 
|Prepaid expenses and other current assets                   |   | 116,172    |   | 100,780   
|                                                            |   |            |   |           
|Total current assets                                        |   | 3,392,241  |   | 3,963,818 
|                                                            |   |            |   |           
|Property, plant and equipment, net (note 5)                 |   | 6,041,348  |   | 4,308,337 
|Patents and intangible assets, net (note 6)                 |   | 45,511     |   | 53,551    
|Investments available for sale (note 7)                     |   | -          |   | 1,437,636 
|Due from estate of former shareholder (note 8)              |   | 284,170    |   | 363,956   
|                                                            |   |            |   |           
|                                                            | $ | 9,763,270  | $ | 10,127,298
|                                                            |   |            |   |           
|Liabilities and Shareholders' Equity                        |   |            |   |           
|                                                            |   |            |   |           
|Current liabilities:                                        |   |            |   |           
|Accounts payable                                            | $ | 399,820    | $ | 1,213,518 
|Accrued liabilities (note 11)                               |   | 418,832    |   | 238,493   
|Customer deposits                                           |   | 92,932     |   | 92,757    
|Current portion of long-term debt (note 10a)                |   | 41,544     |   | 32,957    
|Current portion of capital lease obligations
    (note 10b) |   | 6,071      |   | 4,657     
|Current portion of due to shareholder (note 8)              |   | 30,000     |   | 6,000     
|                                                            |   |            |   |           
|Total current liabilities                                   |   | 989,199    |   | 1,588,382 
|                                                            |   |            |   |           
|Long-term debt (note 10a)                                   |   | 398,540    |   | 374,624   
|Capital lease obligations (note 10b)                        |   | 6,734      |   | 10,902    
|Due to shareholder (note 8)                                 |   | 628,569    |   | 673,309   
|Deferred income taxes (note 15)                             |   | 55,962     |   | 121,767   
|                                                            |   |            |   |           
|                                                            |   | 1,089,805  |   | 1,180,602 
|                                                            |   |            |   |           
|Total liabilities                                           |   | 2,079,004  |   | 2,768,984 
|                                                            |   |            |   |           
|Related party transactions (note 8)                         |   |            |   |           

|Commitments and contingencies (note 21)                           |   |              |   |             
|----------------------------------------------------------------- | - | ------------ | - | ------------
|                                                                  |   |              |   |             
|Shareholders' equity:                                             |   |              |   |             
|Capital stock (note 12)                                           |   |              |   |             
|Authorized:                                                       |   |              |   |             
|100,000 Class A preferred shares of $0.10 each                    |   |              |   |             
|899,400 Class B preferred shares of $0.0167 each                  |   |              |   |             
|10,000,000 common shares of $0.0167 each                          |   |              |   |             
|Issued and outstanding:                                           |   |              |   |             
|899,400 Class B preferred shares (January 31,
    2007 - 899,400) |   | 15,010       |   | 15,010      
|3,072,846 common shares (January 31, 2007 -
    3,072,846)        |   | 51,185       |   | 51,185      
|Contributed surplus                                               |   | 23,499,154   |   | 23,483,659  
|Deficit                                                           |   | (17,779,244) |   | (16,894,033)
|Accumulated other comprehensive income (notes 20
    & 7)         |   | 1,898,161    |   | 702,493     
|                                                                  |   |              |   |             
|                                                                  |   | 7,684,266    |   | 7,358,314   
|                                                                  |   |              |   |             
|                                                                  | $ | 9,763,270    | $ | 10,127,298  

See accompanying notes.

On behalf of the Board:

Director                                              
Director

F-2

---



POLYDEX PHARMACEUTICALS LIMITED

Consolidated Statements of Shareholders' Equity

Years ended January 31, 2008, 2007 and 2006

|                                |           |        |             |              | Accumulated   |              
|------------------------------- | --------- | ------ | ----------- | ------------ | ------------- | -------------
|                                |           |        |             |              | Other         | Total        
|                                | Preferred | Common | Contributed |              | Comprehensive | Shareholders'
|                                | Shares    | Shares | Surplus     | Deficit      | Income (Loss) | Equity       
|                                | $         | $      | $           | $            | $             | $            
|                                |           |        |             |              |               |              
|Balance, January 31, 2005       | 15,010    | 50,676 | 23,303,718  | (15,144,357) | 325,842       | 8,550,889    
|                                |           |        |             |              |               |              
|Common share options exercised  |           | 277    | 82,517      |              |               | 82,794       
|Common share options issued     |           |        | 14,024      |              |               | 14,024       
|Comprehensive income:           |           |        |             |              |               |              
|Net loss for the year           |           |        |             | (1,489,053)  |               | (1,489,053)  
|Unrealized loss on investments  |           |        |             |              |               |              
|available for sale              |           |        |             |              | (12,349)      | (12,349)     
|Currency translation adjustment |           |        |             |              | 631,757       | 631,757      
|                                |           |        |             |              |               |              
|Balance, January 31, 2006       | 15,010    | 50,953 | 23,400,259  | (16,633,410) | 945,250       | 7,778,062    
|                                |           |        |             |              |               |              
|Common share options exercised  |           | 232    | 38,879      |              |               | 39,111       
|Common share options issued     |           |        | 44,521      |              |               | 44,521       
|Comprehensive income:           |           |        |             |              |               |              
|Net loss for the year           |           |        |             | (260,623)    |               | (260,623)    
|Unrealized loss on investments  |           |        |             |              |               |              
|available for sale              |           |        |             |              | (1,321)       | (1,321)      
|Currency translation adjustment |           |        |             |              | (241,436)     | (241,436)    
|                                |           |        |             |              |               |              
|Balance, January 31, 2007       | 15,010    | 51,185 | 23,483,659  | (16,894,033) | 702,493       | 7,358,314    
|                                |           |        |             |              |               |              
|Common share options issued     |           |        | 15,495      |              |               | 15,495       
|Comprehensive income:           |           |        |             |              |               |              
|Net loss for the year           |           |        |             | (885,211)    |               | (885,211)    
|Unrealized gain on investments  |           |        |             |              |               |              
|available for sale              |           |        |             |              | 3,702         | 3,702        
|Currency translation adjustment |           |        |             |              | 1,191,966     | 1,191,966    
|                                |           |        |             |              |               |              
|Balance, January 31, 2008       | 15,010    | 51,185 | 23,499,154  | (17,779,244) | 1,898,161     | 7,684,266    
|                                |           |        |             |              |               |              
|See accompanying notes.         |           |        |             |              |               |              

F-3

---

POLYDEX PHARMACEUTICALS LIMITED

Consolidated Statements of Operations and
Comprehensive Income (Loss)

|Year ended January 31                                        | 2008      | 2007      | 2006       
|------------------------------------------------------------ | --------- | --------- | -----------
|                                                             | $         | $         | $          
|                                                             |           |           |            
|Sales                                                        | 5,734,858 | 6,499,287 | 5,265,209  
|Cost of goods sold                                           | 5,359,794 | 5,666,844 | 4,836,024  
|                                                             |           |           |            
|Gross profit                                                 | 375,064   | 832,443   | 429,185    
|                                                             |           |           |            
|Expenses                                                     |           |           |            
|General and administrative (note 12b)                        | 1,126,269 | 1,205,874 | 1,421,159  
|Research and development (note 14)                           | 135,821   | 214,865   | 205,801    
|Selling and promotion                                        | 84,903    | 171,086   | 129,576    
|Interest expense,net (note 8)                                | 96,818    | 94,790    | 81,509     
|Depreciation                                                 | 39,973    | 42,186    | 61,160     
|Foreign exchange loss (gain)                                 | 43,256    | (22,857)  | (18,139)   
|Loss (gain) on sale of assets                                | -         | (20)      | 4,581      
|Cash surrender value of life insurance                       | (81,045)  | -         | -          
|Interest and other income (note 13)                          | (103,776) | (497,663) | (148,166)  
|Total expenses                                               | 1,342,219 | 1,208,261 | 1,737,481  
|                                                             |           |           |            
|Loss before income taxes                                     | (967,155) | (375,818) | (1,308,296)
|                                                             |           |           |            
|Provision for (recovery of) income taxes (note 15)           | (81,944)  | (115,195) | 180,757    
|                                                             |           |           |            
|Loss for the year                                            | (885,211) | (260,623) | (1,489,053)
|                                                             |           |           |            
|Unrealized gain (loss) on investments
    available for sale | 3,702     | (1,321)   | (12,349)   
|                                                             |           |           |            
|Currency translation adjustment                              | 1,191,966 | (241,436) | 631,757    
|                                                             |           |           |            
|Comprehensive income (loss) for the period                   | 310,457   | (503,380) | (869,645)  
|                                                             |           |           |            
|Per share information:                                       |           |           |            
|Loss per common share:                                       |           |           |            
|Basic                                                        | (0.29)    | (0.09)    | (0.49)     
|Diluted                                                      | (0.29)    | (0.09)    | (0.49)     
|                                                             |           |           |            
|Weighted average number of common shares used
    in         |           |           |            
|computing net loss per share for
    the period:             |           |           |            
|Basic                                                        | 3,072,846 | 3,063,884 | 3,052,296  
|Diluted                                                      | 3,072,846 | 3,063,884 | 3,052,296  

See accompanying notes.

F-4

---



POLYDEX PHARMACEUTICALS LIMITED

Consolidated Statements of Cash Flows

|Year ended January 31                                         | 2008        | 2007        | 2006       
|------------------------------------------------------------- | ----------- | ----------- | -----------
|                                                              | $           | $           | $          
|Cash provided by (used in):                                   |             |             |            
|                                                              |             |             |            
|Operating activities:                                         |             |             |            
|Net loss for the period                                       | (885,211)   | (260,623)   | (1,489,053)
|Add (deduct) items not affecting cash:                        |             |             |            
|Depreciation and amortization                                 | 559,866     | 547,297     | 543,023    
|Imputed interest on long-term debt                            | -           | -           | 1,363      
|Writedown of assets held for sale                             | -           | 4,410       | -          
|Deferred income taxes (Recovery) (note 15)                    | (83,317)    | (69,140)    | 121,478    
|Amortization of premium on investments available
    for sale | -           | 471         | 28,005     
|(Gain) Loss on disposal of equipment                          | -           | (4,430)     | 4,581      
|Licence fee charged to due from shareholder (note
    14)     | 70,280      | 76,978      | 73,740     
|Interest on shareholder loan                                  | (28,998)    |             |            
|Options issued in exchange for services (note
    12b)        | 15,495      | 44,520      | 14,024     
|Net change in non-cash working capital
    balances           |             |             |            
|related to operations (note 16)                               | 53,986      | 322,124     | 277,654    
|                                                              |             |             |            
|Cash provided by (used in) operating activities               | (297,899)   | 661,607     | (425,185)  
|                                                              |             |             |            
|Investing activities:                                         |             |             |            
|Additions to property, plant and equipment and
    patents    | (1,486,866) | (1,724,440) | (418,246)  
|Decrease in due from shareholder                              | 38,504      | 47,777      | 77,718     
|Decrease in accrued interest on investments                   | 3,020       | 57,580      | -          
|Proceeds (Acquisition) of investments available
    for sale  | 805,582     | 1,123,669   | (567,942)  
|Proceeds from sale of equipment                               | -           | 4,430       | 3,748      
|                                                              |             |             |            
|Cash used in investing activities                             | (639,760)   | (490,985)   | (904,722)  
|                                                              |             |             |            
|Financing activities:                                         |             |             |            
|Repayment of long-term debt                                   | (36,932)    | (21,876)    | (47,745)   
|Repayment of capital lease obligations                        | (5,220)     | (169,218)   | (162,873)  
|Increase (decrease) in due to shareholder                     | (20,740)    | 3,390       | (5,385)    
|Increase (decrease) in long-term bank
    indebtedness        | -           | 441,034     | (24,170)   
|Exercise of common share options                              | -           | 39,113      | 82,794     
|                                                              |             |             |            
|Cash provided by (used in) financing activities               | (62,892)    | 292,443     | (157,379)  
|                                                              |             |             |            
|Effect of exchange rate changes on cash                       | 84,126      | (49,521)    | 57,686     
|                                                              |             |             |            
|Net increase (decrease) in cash and cash
    equivalents      | (916,425)   | 413,544     | (1,429,600)
|                                                              |             |             |            
|Cash and cash equivalents, beginning of year                  | 1,384,995   | 971,451     | 2,401,051  
|                                                              |             |             |            
|Cash and cash equivalents, end of year                        | 468,570     | 1,384,995   | 971,451    
|                                                              |             |             |            
|Cash and cash equivalents is comprised of the
    following:  |             |             |            
|Cash                                                          | 171,625     | 382,419     | 236,422    
|Short-term deposits                                           | 296,945     | 1,002,576   | 735,029    
|                                                              |             |             |            
|                                                              | 468,570     | 1,384,995   | 971,451    

See accompanying notes.

F-5

---



Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

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

2. SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation

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

Cash and cash equivalents

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

Use of estimates

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

Inventories

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

Investments available for sale

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

F-6

---



Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Property, plant and equipment and patents and intangible
assets

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

|Buildings                   | 15 years     
|--------------------------- | -------------
|Machinery and
    equipment | 3 to 10 years

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

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

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

Revenue recognition

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

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

Comprehensive income

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

Shipping and handling costs

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

Research and development

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

F-7

---



Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Foreign currency translation

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

Derivative financial instruments

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

Income taxes

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

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

Stock options

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

Loss per common share

Basic loss per common share is computed using the weighted
average number of shares outstanding of 3,072,846 for the year ended January 31,
2008 (2007 - 3,063,884; 2006 - 3,052,296). Diluted loss per common share is
computed using the weighted average number of shares outstanding adjusted for
the incremental shares, using the treasury stock method, attributed to
outstanding options to purchase common stock. No incremental shares in 2008,
2007 or 2006, were used in the calculation of diluted loss per common share.
Options to purchase of 63,699, 37,725, and 42,175 common shares in 2008, 2007
and 2006, respectively, were not included in the computation of diluted loss per
common share because their effect was anti-dilutive.

F-8

---



Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of the following:

|                              | 2008    | 2007     
|----------------------------- | ------- | ---------
|                              | $       | $        
|                              |         |          
|Cash                          | 171,625 | 382,419  
|Short-term money market funds | 296,945 | 1,002,576
|                              | 468,570 | 1,384,995

Short-term money market funds in the amount of Cdn. $298,073
currently bear interest at 4.18%, and consists of commercial paper and Canadian
Government treasury bills, stated at fair value based on quoted market prices.

4. INVENTORIES

Inventories consist of the following:

|                | 2008      | 2007     
|--------------- | --------- | ---------
|                | $         | $        
|                |           |          
|Finished goods  | 790,822   | 792,128  
|Work-in-process | 380,855   | 364,338  
|Raw materials   | 178,813   | 182,391  
|                | 1,350,490 | 1,338,857

5. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

|                        | 2008       | 2007        
|----------------------- | ---------- | ------------
|                        |            |             
|                        |            | Accumulated 
|                        | Cost       | depreciation
|                        | $          | $           
|                        |            |             
|Land and buildings      | 5,242,002  | 1,079,827   
|Machinery and equipment | 9,908,157  | 8,028,984   
|                        | 15,150,159 | 9,108,811   

Included in machinery and equipment are assets under capital
lease with a total cost of $1,204,935 (2007 - $1,025,707) and accumulated
depreciation of $919,651 (2007 - $678,429). Depreciation of assets under capital
lease is included in cost of goods sold. Depreciation of $519,787 was charged to
cost of sales in fiscal 2007 (2007- $505,111). Assets not available for use
amounted to $3,496,281 (2007 - $1,943,142).

F-9

---



Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. PATENTS AND INTANGIBLE ASSETS

Patents and intangible assets consist of the following:

|                              | 2008   | 2007  
|----------------------------- | ------ | ------
|                              | $      | $     
|                              |        |       
|Cost                          | 80,341 | 80,341
|Less accumulated amortization | 34,830 | 26,790
|                              | 45,511 | 53,551

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

7. INVESTMENTS AVAILABLE FOR SALE

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

|                                                                                                                                     | 2008      | 2007     
|------------------------------------------------------------------------------------------------------------------------------------ | --------- | ---------
|                                                                                                                                     | $         | $        
|44,458 units
    (200743,628) of DFA Fixed Income Fund yielding 2.65%                                                               | 418,094   | 344,081  
|TD short term
    bond fund consisting of Canadian government and corporate bonds maturing in
    the next 1-5 years, yielding 3.09% | 346,845   | 284,469  
|4,000
    preferred shares of Diversified 6% preferred share trust units                                                             | 80,095    | 82,429   
|12,500
    capital income trust index units                                                                                          |          | 90,633   
|Debt security
    in the amount of Cdn. $750,000 from General Motors Acceptance Corp., matured
    on June 7, 2007                   |          | 636,024  
|                                                                                                                                     | 845,034   | 1,437,636
|Current
    portion of investments available for sale                                                                                | (845,034) |         
|                                                                                                                                     |          | 1,437,636

As at January 31, 2008, accumulated other comprehensive
income includes unrealized losses on short term bond fund securities available
for sale of $961 (2007  $5,391) and unrealized losses on income fund trust
units and mutual funds of $31,781 (2007-$34,608 of unrealized losses).

The Company expects that the investments available for sale
will be used for working capital for fiscal 2009 and onwards. Accordingly the
investments available for sale have been classified as part of current assets as
at January 31, 2008.

F-10

---



Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. RELATED PARTY TRANSACTIONS

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

|                                                      | 2008      | 2007     
|----------------------------------------------------- | --------- | ---------
|                                                      | $         | $        
|                                                      |           |          
|Amounts due from estate of former
    shareholder [i] | 284,170   | 363,956  
|                                                      |           |          
|Amounts due to shareholder [ii]                       | (658,569) | (679,309)

[i]

Amounts due from
estate of former shareholder (the "Estate") bear interest at the United States
banks prime lending rate plus 1.5% (2008  8.48%; 2007  9.75%), except for an
amount of $310,339 (2007  $380,619) which is non-interest bearing. Interest
income on this loan is recognized monthly. These amounts have no fixed terms of
repayment. The Estate has pledged 270,763 shares of the Company and has pledged
future license fee payments from the Iron Dextran process license agreement [note 13]as collateral for this loan. During 2008, $70,280 (2007  $76,978;
2006  $73,740) of license fee payments were made. The Company will continue to
hold the pledged assets as collateral until the loan is repaid. The Company had
a commitment to pay a death benefit of $110,000 to the Estate. At January 31,
2008, a balance of $36,908 is still to be paid to the Estate. See also "Iron Dextran Process" under Note 13.

[ii]

Amounts due to
shareholder bear interest at the United States banks prime lending rate plus
1.5% (2008  8.48%; 2007  9.75%). The Company is making monthly payments,
inclusive of accrued interest, of $8,000. Based on the current rate of interest,
the principal repayment on this loan for fiscal 2009 would be approximately
$30,000. This loan may not be called.

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

|                 | 2008   | 2007   | 2006  
|---------------- | ------ | ------ | ------
|                 | $      | $      | $     
|                 |        |        |       
|Interest expense | 63,256 | 64,390 | 53,113

9. BANK INDEBTEDNESS

The Company had a Canadian operating line of credit of Cdn.
$750,000 (U.S. $747,160; 2007  U.S. $636,024), none of which was utilized at
January 31, 2008 (2007  Nil). The Canadian line of credit bears interest at the
Canadian banks' prime lending rate plus 0.75% (2008  6.50%; 2007  6.00%).
During March 2006, a term loan of Cdn $500,000 (U.S. $498,100) was obtained for
the purchase of equipment, bearing interest of 6.95% (note 10[a]). Bank
indebtedness is collateralized by a general security agreement over the
Company's assets and a collateral mortgage of Cdn $500,000 on the Dextran
Products Limited ("Dextran Products") building.

Subsequent to the end of fiscal year 2008, the Company
received notice from its Canadian bank that it was in default of one of its
covenants, and that this covenant is to be met on a going forward basis.
Subsequent to the year end the bank has waived this default. The Company's
operating line of credit was also temporarily reduced to Cdn. $250,000 (U.S.
$249,053).

F-11

---



Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

[a]

Long-term debt consists of the
following:

2008
      2007$
      $Note payable in blended
      quarterly payments of Cdn. $419 (U.S. $417), bearing interest at a fixed
      rate of 10%, maturing September 10, 2010, with the vendor holding a
      security interest in the equipment
      2,980
      3,620Bank term loan (note 9)
      payable in monthly installments of Cdn. $5,792 (U.S. $5,770) principal and
      interest at the Canadian banks' prime lending rate plus 0.75% (2008 -
      6.95%), maturing May 2016
      437,104
      403,961440,084
      407,581Less current portion
      41,544
      32,957398,540
      374,624


Interest expense for the year for
long-term debt was $ 31,984 (2007 - $22,913)

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

$2009
      41,5442010
      44,5772011
      46,0972012
      49,4052013
      52,950Thereafter
      205,511440,084


[b]

Capital lease
obligations consist of the following:

2008
      2007$
      $Obligation (Cdn. $12,854)
      under a capital lease, repayable in quarterly installments, bearing
      interest at 10.43% and maturing December 2009. The Company has an option
      to purchase the asset for fair value at the end of the lease term
      12,805
      15,559Less current portion
      6,071
      4,6576,734
      10,902


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

$2009
      7,1832010
      7,183Total minimum lease payments
      14,366Less amount representing imputed
      interest
      1,56112,805


Interest expense for the year for capital lease obligations
was $1,711 (2007 - $9,199)

F-12

---



Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. ACCRUED LIABILITIES

|                                      | 2008    | 2007   
|------------------------------------- | ------- | -------
|                                      | $       | $      
|                                      |         |        
|Plant refurbishment
    costs         | 129,508 | -      
|Utilities and taxes                   | 39,466  | 36,191 
|Professional fees
    payable         | 66,248  | 54,274 
|Death benefit payable                 | 36,908  | 39,519 
|Payroll and related
    taxes payable | 98,736  | 49,624 
|Others                                | 47,966  | 58,885 
|                                      | 418,832 | 238,493

12. CAPITAL STOCK

[a]

Share capital
issued and outstanding

[i] Class A preferred shares

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

[ii] Class B preferred shares

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

[iii] Common shares

During the year ended January 31,
2008, no common share options were exercised, and no common shares were issued.

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

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

[b]

Share option
plan

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

All options granted have a term of
five years and vest immediately. At January 31, 2008, the Company had 63,699
options outstanding at exercise prices ranging from $0.79 to $10.01 and a
weighted average exercise price of $3.34. The options, which are immediately
exercisable and expire on dates between January 31, 2009 and January 31, 2012,
entitle the holder of an option to acquire one common share of the Company.

F-13

---



Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

On January 31, 2008, 37,974 common
share options were issued to the independent directors of the Company. These
options were valued at $15,495 and were included in general and administrative
expense, in accordance with SFAS 123. The fair value for these options was
estimated at the date of grant using the Black-Scholes option pricing model with
the following assumptions: risk-free interest rate of 5.25%; dividend yield of
nil; volatility factor of the expected market price of the Company's common
stock of 0.745, and an expected life of five years.

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

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

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

Weighted averageShare options
      exercise price per share2008
      2007
      2006
      2008
      2007
      2006#
      #
      #
      $
      $
      $Options outstanding,
      beginning of year
      37,725
      42,175
      86,300
      5.64
      4.24
      4.75Granted
      37,974
      13,500
      3,975
      0.79
      6.89
      7.52Exercised
      
      (13,950)
      (16,600)
      
      2.80
      4.99Expired
      (12,000)
      (4,000)
      (31,500)
      2.50
      5.00
      5.66Options outstanding, end of
      year
      63,699
      37,725
      42,175
      3.34
      5.64
      4.24Weighted average fair value
      of options granted during the year
      
      
      
      $0.51
      $4.12
      $3.53


F-14

---



Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes
information relating to the options outstanding at January 31, 2008:

Weighted averageExercise
      Number
      remainingprice
      outstanding
      contractual life$
      
      [months]0.79
      37,974
      603.00
      6,000
      486.86
      4,365
      247.52
      3,975
      367.72
      3,885
      1210.01
      7,500
      4263,699
      50


13. VETERINARY LABORATORIES, INC.

Sparhawk Laboratories, Inc.

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

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

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

F-15

---



Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. 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:

|                                          | 2008    | 2007    | 2006   
|----------------------------------------- | ------- | ------- | -------
|                                          | $       | $       | $      
|                                          |         |         |        
|Research and
    development expenditures | 135,821 | 214,865 | 215,482
|Investment tax credits                    |        |        | (9,681)
|Research and development expense          | 135,821 | 214,865 | 205,801

Iron Dextran process

The Company has an agreement with the Estate which grants the
Company the exclusive worldwide license to use a certain process for producing
Iron Dextran. This license agreement expires in 2014. The Company pays a license
fee based on production volumes. The total license fee incurred during the year
was $70,280 [2007  $76,978; 2006  $73,740]. These payments are applied to the
balance owing by the Estate [note 8[i]].

Cellulose Sulphate BV Clinical Evaluation Program

During September 2004, the Company entered into an agreement
with a research organization to conduct a pilot clinical study on the use of
cellulose sulphate for the treatment of bacterial vaginosis. During the year
ended January 31, 2008, the Company made final payments totaling $21,585. In
March of 2006, the Company also entered into an agreement for the monitoring of
the clinical trial, and a final payment of $26,563 was made during fiscal year
2008.

F-16

---



Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. 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 loss before income
taxes are as follows:

2008
      2007
      2006$
      $
      $Bahamas
      (111,208)
      (244,022)
      (185,653)Canada
      (878,468)
      (510,970)
      (1,088,398)United States
      22,521
      379,174
      (34,245)(967,155)
      (375,818)
      (1,308,296)


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

2008
      2007
      2006$
      $
      $Foreign withholding taxes and
      other on Bahamian income
      
      
      Provision for (recovery of)
      income taxes based on Canadian statutory income tax rates
      (280,466)
      (189,059)
      (370,055)Foreign withholding taxes
      
      
      56,601Decrease in tax reserve
      
      (46,055)
      Increase in valuation
      allowance
      216,216
      81,833
      651,107Tax and exchange rate changes
      on deferred tax items
      22,823
      (3,554)
      (13,343)Items not deductible for tax
      (40,517)
      41,640
      (19,603)(81,944)
      (115,195)
      304,707Provision for (recovery of)
      income taxes based on United States income tax rates
      8,333
      140,294
      (12,671)Utilization of previously
      unrecognized tax losses
      (8,333)
      (140,294)
      Decrease in valuation
      allowance
      
      
      (111,279)
      
      (123,950)Provision for (recovery of)
      income taxes
      (81,944)
      (115,195)
      180,757


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

2008
      2007
      2006$
      $
      $Canadian deferred
      tax recovery
      (83,317)
      (69,140)
      (183,285)Canadian deferred
      tax expense
      
      
      304,763Canadian current tax
      expense (recovery)
      1,373
      (46,055)
      183,229United States
      deferred tax expense
      
      
      United States
      current tax expense
      
      
      United States current tax recovery
      
      
      (123,950)(81,944)
      (115,195)
      180,757


F-17

---



Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

[b]

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

2008
      2007
      2006$
      $
      $Deferred tax
      assetsCanadianNon-capital losses
      1,053,398
      1,120,327
      1,054,054Unclaimed research and development expenses
      315,905
      285,444
      295,518Net capital losses [note 15[c]]
      200,055
      164,976
      188,353Other items
      14,414
      15,160
      27,733United StatesNet operating loss carryforwards
      29,378
      42,981
      84,371Allowance on Sparhawk note [note 13]
      
      
      84,2061,613,150
      1,628,888
      1,734,235Less valuation allowance
      1,613,150
      1,628,888
      1,734,235
      
      Deferred tax
      liabilitiesExcess of carrying
      value over tax value of depreciable assets
      (47,120)
      (119,097)
      (185,353)Investment tax credits and other
      items
      (8,842)
      (2,670)
      (9,585)Net deferred tax liabilities
      (55,962)
      (121,767)
      (194,938)


[c]

The Canadian
subsidiaries have non-capital loss carryforwards available to reduce future
years' income for tax purposes totaling approximately $3,882,000. These
non-capital losses expire from 2009 to 2028 and are stated below.

Year of expiry
      $2009
      384,0002010
      151,0002011
      265,0002015
      600,0002026
      710,0002027
      511,0002028
      1,261,000Total
      3,882,000


The Canadian subsidiaries also have
deductions available to reduce future years' income for tax purposes on account
of net temporary differences resulting from expense items reported for income
tax purposes in different periods than for financial statement purposes totaling
approximately $1,230,000 and $558,000 for federal and provincial purposes,
respectively. Certain Canadian subsidiaries also have net capital losses
available for carryforward of approximately $608,000 available to offset future
taxable capital gains. These potential deductions and net capital losses have an
indefinite carryforward period.

[d]

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

F-18

---



Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16. CONSOLIDATED STATEMENTS OF CASH FLOWS

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

|                                           | 2008      | 2007      | 2006    
|------------------------------------------ | --------- | --------- | --------
|                                           | $         | $         | $       
|                                           |           |           |         
|Decrease (increase) in current assets      |           |           |         
|Trade accounts receivable                  | 691,495   | (436,313) | 246,607 
|Interest receivable                        |          | 41,511    |        
|Inventories                                | 212,075   | 164,193   | 98,154  
|Prepaid expenses and other current assets  | (3,566)   | 26,287    | (7,926) 
|                                           | 900,004   | (204,322) | 336,835 
|Increase (decrease) in current liabilities |           |           |         
|Accounts payable                           | (978,507) | 685,309   | 66,247  
|Accrued liabilities                        | 147,783   | (117,143) | (27,892)
|Customer deposits                          | (15,294)  | 3,113     | (13,006)
|Income taxes payable                       |          | (44,833)  | (84,530)
|                                           | 53,986    | 322,124   | 277,654 

Cash paid during the year for interest was $96,818 (2007 
$89,365; 2006  $27,033). Cash paid during the year for income taxes was Nil
(2007  $Nil; 2006  $3,891).

There were no capital equipment acquisitions under capital
leases for the years ended January 31, 2008, 2007 and 2006.

17. SEGMENTED INFORMATION

All operations are carried out through Dextran Products
Limited ("Dextran") in Canada and through Chemdex in the United States. Each of
Dextran and Chemdex operated as separate strategic business units offering
different products, until the sale of the finished product veterinary
pharmaceutical business on March 4, 2004 [note13]. Until March 4, 2004,
each subsidiary comprised a reportable segment as follows:

- 



After March 4, 2004, Chemdex only sells bulk quantities of a
specific dextran derivative to Sparhawk under the Supply Agreement, as described
in note 13. Management has since determined that Polydex Pharmaceuticals
does not operate differing segments, and that providing such information would
not be informative to readers of these financial statements. The comparative
information for 2006 has therefore been restated to conform to this basis of
reporting.

F-19

---



Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|                                           | 2008       | 2007       | 2006      
|------------------------------------------ | ---------- | ---------- | ----------
|                                           | $          | $          | $         
|Total revenue by significant
    customer: |            |            |           
|Customer A                                 | 1,106,972  | 1,296,702  | 1,111,402 
|Customer B                                 | 655,107    | 618,878    | 534,222   
|Customer C                                 | 578,120    | 275,200    | 346,605   
|Customer D                                 | 538,033    | 155,420    | 47,500    
|Customer E                                 | 427,206    | 668,001    | 379,342   
|Customer F                                 | 10,115     | 780,039    | 452,820   
|                                           | 3,315,553  | 3,794,240  | 2,871,891 
|                                           |            |            |           
|                                           | 2008       | 2007       | 2006      
|                                           | $          | $          | $         
|Sales by geographic destination:           |            |            |           
|Europe                                     | $1,928,278 | $2,796,710 | $2,237,430
|United States                              | 1,475,295  | 1,283,251  | 1,086,243 
|Canada                                     | 1,035,040  | 893,977    | 512,031   
|Pacific Rim                                | 844,217    | 581,581    | 794,015   
|Other                                      | 452,028    | 943,768    | 635,490   
|                                           | $5,734,858 | $6,499,287 | $5,265,209

18. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

The carrying values of cash and cash equivalents, trade
accounts receivable, interest receivable and accounts payable approximate their
fair values as at January 31, 2008 because of the short period to maturity of
these financial instruments.

The estimated fair values of the bank indebtedness, due to
shareholder, long-term debt and capital lease obligations are not materially
different from the carrying values for financial statement purposes as at
January 31, 2008 and 2007. The estimated fair value of the amount due from
shareholder is not determinable because the amount has no fixed terms of
repayment.

19. OTHER DISCLOSURES

[a]

Concentration of
accounts receivable

As at January 31, 2008, three (2007 -
four) customers of the Company comprised 74% (2007 - 68%) of the trade accounts
receivable balance. No other customers had trade accounts receivable outstanding
at year end that represented more than 10% of the Company's trade accounts
receivable balance.

[b]

Foreign currency
risk

The Company is exposed to foreign
currency risk through its net investment in its Canadian operations. The Company
has not entered into hedging arrangements related to the foreign currency risk
exposure.

F-20

---



Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

20. ACCUMULATED OTHER COMPREHENSIVE INCOME

The components of other accumulated comprehensive income are
as follows:

|                                                        | 2008      | 2007    
|------------------------------------------------------- | --------- | --------
|                                                        | $         | $       
|                                                        |           |         
|Unrealized losses on
    investments available for sale | (9,968)   | (13,670)
|Currency translation                                    | 1,908,129 | 716,163 
|Accumulated other comprehensive
    income              | 1,898,161 | 702,493 

21. COMMITMENTS AND CONTINGENCIES

As at January 31, 2008, the Company had commitments of
$20,024 for capital expenditures related to the plant refurbishment (2007 -
$545,488) at Dextran Products in Toronto, and no additional other commitments
(2007  $53,542).

22. RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

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

F-21

---



Polydex Pharmaceuticals Limited

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

In February 2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities-Including an
amendment of FASB Statement No.115. SFAS No. 159 permits entities to choose
to measure many financial instruments and certain other items at fair value. The
objective is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. SFAS No. 159 is effective as of the beginning of an
entity's first fiscal year that begins after November 15, 2007. The adoption of
SFAS 159 does not have an impact on our consolidated financial statements.

In December 2007, the FASB revised SFAS No. 141, Business
Combinations.SFAS No. 141 (revised 2007) improves the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a business combination
and its effects. SFAS No. 141 (revised 2007) is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Early
application is not permitted before that date. As such, the Company is required
to adopt these provisions during the fiscal year ending January 31, 2010. The
Company is currently evaluating the impact of SFAS No. 141 (revised 2007) on its
financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements  an amendment of ARB No. 51. SFAS 160 improves the relevance, comparability, and transparency
of the financial information that a reporting entity provides in its
consolidated financial statements by establishing accounting and reporting
standards. SFAS No. 160 is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008, earlier
adoption is prohibited. As such, the Company is required to adopt these
provisions at the beginning of the fiscal year ending January 31, 2010. The
Company is currently evaluating the impact of SFAS No. 160 on its financial
statements.

In March 2008, the FASB issued Statement of Financial
Accounting Standard No. 161, Disclosures about Derivative Instruments and
Hedging Activities  an amendment of FASB Statement No. 133. SFAS No. 161
requires enhanced disclosures about an entity's derivative and hedging
activities and thereby improves the transparency of financial reporting. SFAS
No. 161 is effective for fiscal years, and interim periods within those fiscal
years, beginning after November 15, 2008, with early adoption encouraged. As
such, the Company is required to adopt these provisions at the beginning of the
fiscal year ended January 31, 2010. The Company is currently evaluating the
impact of SFAS No. 161 on its financial statements.

F-22

---



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

None

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls

Disclosure controls and procedures
are designed to ensure that information required to be disclosed in the reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in the
reports filed under the Exchange Act is accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. The
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures cannot be relied
upon to ensure that information required to be disclosed in the reports the
Company files and submits under the Exchange Act is recorded, processed,
summarized and reported as and when required.

Management's Report on Internal Control over Financial Reporting

Management of the Company is
responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934. We have assessed the effectiveness of those internal controls as of
January 31, 2008.

Because of inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies and procedures
may deteriorate. All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.

A material weakness in internal
controls is a deficiency in internal control, or combination of control
deficiencies, that adversely affects the Company's ability to initiate,
authorize, record, process, or report external financial data reliably in
accordance with accounting principles generally accepted in the United States of
America such that there is more than a remote likelihood that a material
misstatement of the Company's annual or interim financial statements that is
more than inconsequential will not be prevented or detected. In the course of
making our assessment of the effectiveness of internal controls over financial
reporting, we identified a material weakness in our internal control over
financial reporting. This material weakness consisted of inadequate staffing
within the accounting operations of our company. The small number of employees
who are responsible for accounting functions prevents us from segregating duties
within our internal control system. The inadequate segregation of duties is a
weakness because it could lead to the untimely identification and resolution of
accounting and disclosure matters or could lead to a failure to perform timely
and effective reviews. Due to this material weakness, management could not
conclude that its internal control over financial reporting was effective as of
January 31, 2008.

Our review also indicated the
existence of certain high level procedures that might or might not serve to
provide compensating control over these weaknesses. These procedures consisted
of analytical review of key operating results by senior management of the
Company, including preparation and review of monthly operating results,
comparison of such results to budgets and to historical amounts, and
comprehensive gross profit analysis. In addition, the Board of Directors
received monthly updates on operations, and on a quarterly basis, reviews,
investigates and discusses apparent inconsistencies and concerns with senior
operating management.

28

---



Our review also revealed that
although a number of controls appeared to exist, and indeed were observed to
have been in operation, documentary evidence that such controls were operating
throughout the period was found to be lacking. Such evidence as signatures
indicating that a certain procedure had been carried out and affixing
responsibility were lacking in the internal control system.

ITEM 9B. OTHER INFORMATION

In January of 2008, the Company
received a NASDAQ Staff Deficiency Letter from The NASDAQ Stock Market notifying
it that the Company's bid price per share for its common stock had closed below
the $1.00 minimum bid price for 30 consecutive business days. As a result, the
Company no longer met the requirements of Marketplace Rule 4310(c)(4) for
continued listing on The NASDAQ Capital Market and had 180 calendar days, or
until July 14, 2008, to regain compliance. During this 180-day period, Polydex
shares will continue to trade on The NASDAQ Capital Market.

To regain compliance, the closing bid
price of the Company's common stock must remain at or above $1.00 for a minimum
of 10 consecutive business days prior to the end of the 180 calendar day
compliance period. If the Company does not regain compliance by the end of the
compliance period (or any extension thereof) and chooses not to appeal the
decision of The NASDAQ Stock Market to delist its common stock, Polydex common
stock will be delisted from The NASDAQ Capital Market.

The Company issued a news release regarding this
matter on January 22, 2008.

PART III

ITEMS 10-14.

Pursuant to General Instruction G (3) of Form 10-K, Items 10
through 14, inclusive, have not been restated or answered in this annual report
on Form 10-K because the Company intends to file within 120 days after the close
of its fiscal year with the Securities and Exchange Commission a definitive
proxy statement pursuant to Regulation 14A under the Securities Exchange Act of
1934, which proxy statement involves the election of directors. The information
required in these Items 10 through 14, inclusive is incorporated by reference to
that proxy statement.

29

---



PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





Report of Independent Auditors  Schwartz Levitsky
Feldman LLP 
Consolidated Balance Sheets 
Consolidated Statements of Shareholders' Equity 
Consolidated Statements of Operations 
Consolidated Statements of Cash Flows 
Notes to Consolidated Financial Statements

(2) Financial Statement Schedules



(3) Exhibits



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



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



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



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

10.3

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



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

10.5

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

30

---

10.6

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



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



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

21

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

31.1

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

31.2

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

32.1

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

32.2

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



31

---



SIGNATURES

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

|                     | POLYDEX PHARMACEUTICALS LIMITED    
|-------------------- | -----------------------------------
|Date: April 30, 2008 | By: /s/ George G. Usher            
|                     | George G. Usher, President and     
|                     | Chief Executive Officer            
|                     |                                    
|Date: April 30, 2008 | /s/ John A. Luce                   
|                     | Chief Financial Officer            
|                     | (Principal Financial and Accounting
|                     | Officer)                           

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

|Date:April 30,
    2008 | /s/ George G. Usher                     
|----------------------- | ----------------------------------------
|                        | George G. Usher,
    Director, President
|                        | and Chief Executive
    Officer         
|                        | (Principal Executive
    Officer)       
|                        |                                         
|Date: April 30, 2008    | /s/ Joseph Buchman                      
|                        | Joseph Buchman,
    Director            
|                        |                                         
|Date: April 30, 2008    | /s/ Derek John
    Michael Lederer      
|                        | Derek John Michael
    Lederer, Director
|                        |                                         
|Date: April 30, 2008    | /s/ John L.E.
    Seidler               
|                        | John L.E. Seidler,
    Director         

32

---



EXHIBIT INDEX

|     |                                                                                                       
|---- | ------------------------------------------------------------------------------------------------------
|31.1 | Certification of Chief
    Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002    
|     |                                                                                                       
|31.2 | Certification of Chief
    Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002    
|     |                                                                                                       
|32.1 | Certification of Chief
    Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|     |                                                                                                       
|32.2 | Certification of Chief
    Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

33

---