**SECURITIES
        AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
 
 **FORM
        10-K**
  ý
              ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934 FOR THE FISCAL YEAR ENDED JANUARY 31,
                  2007
  **OR**
   ̈
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
  Commission
        File Number: 1-8366
 
 
 **POLYDEX
        PHARMACEUTICALS LIMITED**
 (Exact
        name of Registrant as specified in its charter)
  **Commonwealth
                  of the Bahamas**
              
              **None**(State
                  or other jurisdiction
                  of
              
              (I.R.S.
                  Employerincorporation
                  or
                  organization
              
              Identification
                  Number)
 
 **421
        Comstock Road**
 **Toronto,
        Ontario, Canada**
 (Address
        of principal executive offices)
 
 **M1L
        2H5.**
 (zip
        code)
  Registrant’s
        telephone number, including area code **(416)
        755-2231**
  Securities
        registered pursuant to Section 12(b) of the Act: None
  Securities
        registered pursuant to Section 12(g) of the Act:
  **Common
        Stock, $0.0167 par value**
 (Title
        of Class)
  Indicate
        by check mark whether the Registrant is a well-known seasoned issuer, as
        defined
        in Rule 405 of the Securities Act. Yes o No x
  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 o No x
  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. Yes x No
o
  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. o
  
  
  Indicate
        by check mark whether the Registrant is a large accelerated filer, an
        accelerated filer or a non-accelerated filer. See definition of accelerated
        filer and large accelerated filer in Rule 12b-2 of the Act.
  Large
        Accelerated oFilerAccelerated
oFilerNon-Accelerated Filer x
  Indicate
        by check mark whether the Registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes o No x
  The
        aggregate market value of the Registrant’s voting common shares held by
        non-affiliates of the Registrant, based upon the $3.00 per share closing
        price
        of the Registrant’s common shares on January 31, 2007 was approximately
        $7,107,648. For purposes of this calculation, the Registrant’s directors,
        executive officers and holders of more than 10% of the Registrant’s common
        shares have been assumed to be affiliates.
  The
        number of common shares of the Registrant outstanding as of April 27, 2007,
        was
        3,072,846.
  Portions
        of the Registrant’s Notice of Annual Meeting and Proxy Statement for the
        Registrant’s 2007 Annual Meeting of Members, scheduled to be held on July 6,
        2007, are incorporated by reference into Part III of this
        Report.
  2


**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.




3


**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 subsidiaries. The
      manufacture and sale of Dextran and derivative products is conducted through
      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.




***Dextran
      Sulphate***




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




**Patents,
      Trademarks and Licenses**




***Cellulose
      Sulphate***




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




4




During
      fiscal year 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 or are in process,
      and further trials are planned by the Company.




During
      fiscal year 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.




***Cystic
      Fibrosis***




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.




5




**Suppliers**




***Dextran
      Products***




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




The
      Company is dependent upon a single source for a certain raw material used in
      the
      production of Dextran Sulphate. Such supply was adequate in fiscal year 2007,
      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, 2007 was consistent with the orders on
      hand for January 31, 2006. 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 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,
      the
      Company sold its finished product veterinary pharmaceutical business to its
      former joint venture partner, Sparhawk. In connection with the sale, Sparhawk
      and Chemdex entered into an exclusive Supply Agreement under which Sparhawk
      agreed to purchase 100% of its product needs for bulk Iron Dextran solution
      from
      Chemdex for a period of 10 years, and Chemdex agreed to sell such products
      in
      the United States exclusively to Sparhawk, subject to minimum purchase
      requirements.




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




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




6


**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, 2007, the Company employed 24 employees, of whom 15 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, 2007, 2006 and 2005, the Company expended
      $214,865, $215,482 and $127,847 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, 2006 and 2005, the
      Company recognized investment tax credit benefits of $9,681 and $13,105
      respectively.




***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.




During
      fiscal year 2007 several clinical trials were conducted, ongoing and commenced.




In
      particular:




•
            A
                study to determine the effectiveness of Cellulose Sulphate gel as
                a
                treatment for Bacterial Vaginosis, a common disorder among
                reproductive-age women, was undertaken at the University of Campinas,
                in
                San Paolo, Brazil. The trial is complete and a report on findings
                is
                expected in fiscal 2008.




•
            Two
                Phase III clinical trials to assess the effect of Ushercell on vaginal
                HIV
                acquisition were started in six clinical trial sites located in India
                and
                Africa. These trials were being conducted by CONRAD, in collaboration
                with
                Family Health International with financial support from USAID and
                the Bill
                and Melinda Gates Foundation. The Phase III trials had staggered
                commencement dates in October 2004 and May 2005. On January 31, 2007,
                the
                Independent Review Board in conjunction with CONRAD, WHO, FHI and
                Polydex
                announced the halting of the trials 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 2008.




7




***Cystic
      Fibrosis***




Cystic
      fibrosis is a genetic disease, which causes a cascade of effects, the most
      severe being a build up of mucus in the lungs. This mucus is difficult to remove
      and also permits the colonization of bacteria, which then cause secondary
      infections and often death. Research relating to cystic fibrosis has shown
      that
      a special form of Dextran, named by the Company 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
      FEV 1 (forced
      expiratory volume in one second), a measure of lung function, and the reduction
      of Pseudomonas aeruginosa bacterial load in patient sputum. BCY LifeSciences
      was
      also granted a patent entitled “Use of Dextran and Other Polysaccharides to
      Improve Mucus Clearance” by the European Patent Office. The Company will receive
      royalty payments based upon sales and other revenues upon approval of any
      developed product pursuant to its license agreement with BCY LifeSciences.
      In
      February of 2005, BCY LifeSciences entered into a development agreement with
      Align Pharmaceuticals to fund ongoing studies on the compound.




**Segmented
      Information**




The
      information regarding the geographic distribution of revenue 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, 2007 under Item
      8 *Financial
      Statements and Supplementary Data* .




8


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. 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,
                recently 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.




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




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




•
            the
                product is uneconomical or if the market for the product does not
                develop
                or diminishes;




•
            the
                Company is not able to enter into arrangements or collaborations
                to
                commercialize and/or market the product;




•
            the
                product is not eligible for third-party reimbursement from government
                or
                private insurers;




•
            others
                hold proprietary rights that preclude the Company from commercializing
                the
                product;




•
            others
                have brought to market similar or superior products;




9




•
            others
                have superior resources to market similar products or
                technologies;




•
            government
                regulation imposes limitations on the indicated uses of the product,
                or
                later discovery of previously unknown problems with the product results
                in
                added restrictions on the product or results in the product being
                withdrawn from the market; and/or




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




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




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




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




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




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




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




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




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.




10




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




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




ITEM
      1B. UNRESOLVED
      STAFF COMMENTS




None




ITEM
      2. PROPERTIES




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




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




During
      fiscal year 2007, management determined that expansion of the Company’s facility
      and modernization of its powder-producing equipment in Toronto should both
      increase production capacity and also improve quality for a significant portion
      of the Company’s powdered products. The Company therefore 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
      being installed and construction is expected to be completed in the second
      quarter of fiscal year 2008. It is expected that improved quality of the
      finished product will result in new markets becoming available.




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, 2007.




11


**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 2007**
              **fiscal
                quarter ended:**
            
            **High**
            
            **Low**April
                30, 2006
            
            $
            10.43
            
            
            7.03July
                31, 2006
            
            
            10.50
            
            
            8.55October
                31, 2006
            
            
            9.30
            
            
            6.81January
                31, 2007
            
            
            8.00
            
            
            2.61







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




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
      27,
      2007 there
      were approximately 346 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 its 2007 fiscal
      year
      and does not currently have a plan to repurchase any of its common
      shares.




12


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,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003**Sales
                from continuing operations
            
            
            6,499,287
            
            
            5,265,209
            
            
            6,372,359
            
            
            14,092,189
            
            
            12,786,343Net
                income (loss) from continuing operations
            
            
            (260,623
            )
            
            (1,489,053
            )
            
            1,139,911
            
            
            (5,999
            )
            
            (673,741
            )Net
                income (loss) per common share
            
            
            (0.09
            )
            
            (0.49
            )
            
            0.38
            
            
            —
            
            
            (0.22
            )Total
                assets
            
            
            10,127,298
            
            
            9,910,445
            
            
            10,811,873
            
            
            10,510,513
            
            
            9,712,574Long-term
                borrowings
            
            
            1,058,835
            
            
            691,178
            
            
            833,631
            
            
            1,013,701
            
            
            1,188,603




13


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




*The
      Company’s fiscal year ends on January 31* *st* *of
      each year. In this report, fiscal year 2007 refers to the Company’s fiscal year
      ended January 31, 2007. 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 above 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 distribution chains for existing Dextran products
      in
      certain overseas markets, such as India, China and Russia, 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 product. These products have traditionally
      generated higher margins.




Research
      and development of the Company’s human pharmaceutical products is also
      coordinated at the Dextran Products facility.




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 2008. 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 never
      received any financial gain from this project, and as a result, there is no
      immediate or direct effect on sales or revenues.




14




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




During
      approximately one month of the 2005 fiscal year, the Company also engaged in
      the
      finished product veterinary pharmaceutical business through its United States
      subsidiary Chemdex, which, in turn, conducted its operations through its
      subsidiary, Vet Labs. On December 1, 1992, Vet Labs and Sparhawk Laboratories
      Inc. entered into a Joint Venture for the purpose of manufacturing and selling
      veterinary pharmaceutical products. On January 13, 2004, the Company, Chemdex
      and Vet Labs entered into an Asset Purchase Agreement with Sparhawk pursuant
      to
      which the Company agreed to sell its finished product veterinary pharmaceutical
      business, including substantially all of the assets of Vet Labs and its
      ownership interest in the Joint Venture, to Sparhawk for $5,500,000 in cash.
      The
      sale was completed on March 4, 2004. Simultaneously with the closing, Chemdex
      advanced $350,000 to Sparhawk in exchange for an unsecured subordinated
      promissory note bearing interest at 13% per annum and a warrant to purchase
      4%
      of the equity of Sparhawk. The promissory note 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.




**Results
      of Operations**




***Fiscal
      Year ended January 31, 2007 compared to Fiscal Year ended January 31, 2006
      compared to Fiscal Year ended January 31, 2005***





**Fiscal
                Years****FY
                2007**
            
            **FY
                2006**
            
            **FY
                2005**
            
            **07
                v 06**
            
            **06
                v 05****(%
                increase (decrease)**Net
                income (loss) before taxes
            
            $
            (375,818
            )
            $
            (1,308,296
            )
            $
            1,706,777
            
            
            71
            %
            
            (177
            )%Net
                income (loss)
            
            
            (260,623
            )
            
            (1,489,053
            )
            
            1,139,911
            
            
            83
            %
            
            (231
            )%Earnings
                (loss) per share
            
            
            (0.09
            )
            
            (0.49
            )
            
            0.38





The
      improvement 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 12). These gains were partially offset by the poor margins in
      the
      fourth quarter of fiscal 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, because the majority of its revenue is
      denominated in United States dollars while the majority of its cost of sales
      is
      denominated in Canadian dollars. Therefore, when the value of the Canadian
      dollar increases in relation to the United States dollar, margins decrease.





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.




15




The
      United States dollar continued to decline in value relative to the Canadian
      dollar during fiscal year 2007. Exchange rate fluctuations resulted in a 4%
      decrease in margins at Dextran Products in fiscal year 2007 compared to the
      previous fiscal year (6% decrease in fiscal year 2006 compared to fiscal 2005).





**Fiscal
                Years****FY
                2007**
            
            **FY
                2006**
            
            **FY
                2005**
            
            **07
                v 06**
            
            **06
                v 05****(%
                increase (decrease))****Sales**
            
            $
            6,499,287
            
            $
            5,265,209
            
            $
            6,372,359
            
            
            23
            %
            
            (17
            )%




Sales
      increased in fiscal year 2007 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 2007 increased by 10% compared to
      fiscal 2006.




The
      decrease in sales during fiscal year 2006 is due primarily to the fact that
      the
      fiscal year 2005 included one month of sales in the Vet Labs joint venture,
      while fiscal year 2006 only includes raw materials sales to Sparhawk.





**Fiscal
                Years****FY
                2007**
            
            **FY
                2006**
            
            **FY
                2005**
            
            **07
                v 06**
            
            **06
                v 05****(%
                increase (decrease))****Gross
                profit**
            
            $
            832,443
            
            $
            429,185
            
            $
            1,516,418
            
            
            94
            %
            
            (72
            )%Percentage
                of sales
            
            
            13
            %
            
            8
            %
            
            24
            %




The
      increase in gross profit in fiscal year 2007 is 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. Management continues to be
      concerned about the increasing cost and utilization of utilities, and is hopeful
      that cost savings will result from the new equipment being implemented as part
      of the plant refurbishment. Overall margins were negatively impacted during
      the
      fourth quarter of fiscal 2007 due to unusually large sales of lower margin
      products to some major customers, combined with unexpected increases in
      equipment repairs and utility costs.




The
      decline in gross profit in fiscal year 2006 resulted from the increased cost
      of
      sales, which was exacerbated by the continued increase in value of the Canadian
      dollar compared to the United States dollar.





**Fiscal
                Years****FY
                2007**
            
            **FY
                2006**
            
            **FY
                2005**
            
            **07
                v 06**
            
            **06
                v 05****(%
                increase (decrease))****Selling,
                promotion, general and****Administrative
                expenses**
            
            $
            1,376,960
            
            $
            1,550,735
            
            $
            1,594,580
            
            
            (11
            )%
            
            (3
            )%




In
      fiscal
      year 2007, management continued its efforts to reduce 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 2006. Offsetting
      these cost savings was an increase in selling and promotion expenses. During
      fiscal 2007, the Company attended several functions relating to the cellulose
      sulphate project. Missions to Microbicides 2006 in South Africa as well as
      visits to India to source production partners were also undertaken. Some
      sponsorship was funded at Microbicides 2006 as well as at the large Toronto
      AIDS
      conference during the summer. The Company expects a significant reduction in
      these costs for fiscal 2008.




16




In
      fiscal
      year 2006, overall selling, promotion and general and administrative expenses
      remained consistent with fiscal year 2005. During fiscal year 2006,
      administrative expenses decreased slightly for Dextran Products, although this
      was offset by the continuing rise in the Canadian dollar. General and
      administrative expenses for Chemdex decreased in fiscal year 2006 due primarily
      to the one month of operations included in fiscal year 2005





**Fiscal
                Years****Research
                and development**
            
            **FY
                2007**
            
            **FY
                2006**
            
            **FY
                2005**
            
            **07
                v 06**
            
            **06
                v 05****(%
                increase (decrease)**Research
                and developmentExpenditures
            
            $
            214,865
            
            $
            215,482
            
            $
            127,847
            
            
            —
            
            
            68
            %Investment
                tax credits
            
            
            —
            
            
            (9,681
            )
            
            (13,105
            )
            
            (100
            )%
            
            (26
            )%Net
                research and development expense
            
            $
            214,865
            
            $
            205,801
            
            $
            114,742
            
            
            4
            %
            
            79
            %




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. It is
      expected that their report will be available later this year at which point
      a
      decision can be made on further activities. Therefore for fiscal year 2008,
      it
      is expected that research and development expenditures will be reduced. In
      fiscal years 2006 and 2005, the majority of expenses related to the clinical
      trial on bacterial vaginosis.





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





**Fiscal
                Years****FY
                2007**
            
            **FY
                2006**
            
            **FY
                2005**
            
            **07
                v 06**
            
            **06
                v 05****(%
                increase (decrease))****Depreciation
                and amortization expense**
            
            $
            547,297
            
            $
            543,023
            
            $
            513,095
            
            
            1
            %
            
            6
            %




17





The
      increase in depreciation and amortization in fiscal year 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 $505,111 for fiscal year
      2007
      (2006 - $481,863; 2005 - $468,212).





**Fiscal
                Years****FY
                2007**
            
            **FY
                2006**
            
            **FY
                2005**
            
            **07
                v 06**
            
            **06
                v 05****(%
                increase (decrease))****Interest
                expense**
            
            $
            94,790
            
            $
            81,509
            
            $
            91,210
            
            
            16
            %
            
            (11
            )%





The
      increase in interest expense in fiscal year 2007 is primarily 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.





In
      fiscal
      year 2006, the decrease in interest expense relative to the prior fiscal year
      was primarily attributable to a decrease in long-term debt and capital lease
      obligations, as well as the associated decrease in imputed interest due to
      the
      continuing repayment of non-interest bearing long-term debt.





**Fiscal
                Years****FY
                2007**
            
            **FY
                2006**
            
            **FY
                2005**
            
            **07
                v 06**
            
            **06
                v 05****(%
                increase (decrease))****Foreign
                exchange gain**
            
            $
            22,857
            
            $
            18,139
            
            $
            46,172
            
            
            26
            %
            
            (61
            )%





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. Dextran Products also realized
      a
      foreign exchange gain in fiscal year 2006 because the Canadian dollar increased
      in value relative to the United States dollar. Throughout fiscal years 2006
      and
      2007, Dextran Products generally had a net liability exposure to the United
      States dollar because intercompany payables denominated in United States dollars
      normally exceeded its United States dollar denominated accounts receivable
      balances.





**Fiscal
                Years****FY
                2007**
            
            **FY
                2006**
            
            **FY
                2005**
            
            **07
                v 06**
            
            **06
                v 05****(%
                increase (decrease))****Interest
                and other income**
            
            $
            497,663
            
            $
            148,166
            
            $
            130,131
            
            
            236
            %
            
            14
            %





The
      increase in interest and other income in fiscal year 2007 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.





In
      fiscal
      year 2006, the Company earned interest income of $148,166 from the investment
      of
      the proceeds from the sale of Vet Labs assets.




18





**Fiscal
                Years****FY
                2007**
            
            **FY
                2006**
            
            **FY
                2005**
            
            **07
                v 06**
            
            **06
                v 05****(%
                increase (decrease))****Tax
                provision (recovery)**
            
            $
            (115,195
            )
            $
            180,757
            
            $
            566,866
            
            
            (163
            )%
            
            (68
            )%




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.





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




**Liquidity
      and Capital Resources**




As
      of
      January 31, 2007, the Company had cash and cash equivalents of $1,384,995,
      compared to $971,451 at January 31, 2006. In fiscal year 2007, the Company
      generated cash of $661,607 in its operating activities, compared to expending
      $425,185 for fiscal year 2006 and $310,351 for fiscal year 2005. The decrease
      in
      cash generated from operations in fiscal year 2006 as compared to fiscal year
      2005 is because of the decrease in earnings. Depreciation and amortization
      continues to be a large non-cash expense of the Company, which is expected
      to
      increase in fiscal 2008 as result of assets acquired as part of the
      refurbishment become operational.




Working
      capital improved to $2,375,436, but the current ratio declined to 2.50 to 1
      as
      of January 31, 2007, compared to $2,190,321 and 2.76 to 1 as of January 31,
      2006.




Management
      expects the primary source of its future capital needs will be a combination
      of
      existing cash and cash equivalent reserves generated from the sale of the Vet
      Labs assets, Company earnings and borrowings. As at January 31, 2007, the
      Company had commitments of $545,488 for capital expenditures related to the
      plant refurbishment at Dextran Products in Toronto, and $53,542 for other
      commitments.




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




At
      January 31, 2007, the Company had accounts receivable of $1,139,186 and
      inventory of $1,338,857, compared to $744,720 and $1,549,544, respectively,
      at
      January 31, 2006. The increase in accounts receivable at January 31, 2007 is
      due
      to the timing of payments and the large volume of sales in the fourth quarter
      compared to fiscal 2006. At January 31, 2007, the Company had accounts payable
      of $1,213,518, compared to $574,270 at January 31, 2006. The increase as at
      January 31, 2007 was due primarily to the timing of supplier payments as well
      as
      costs related to the plant refurbishment in the fourth quarter. During fiscal
      year 2007, capital expenditures totaled $1,724,440, as compared to $418,246
      in
      fiscal year 2006. 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 2008.




19




During
      fiscal year 2007, the Company continued to decrease its investment in
      medium-term, investment-grade, debt securities, while maintaining investments
      in
      fixed income mutual funds, and diversified royalty and income trust units,
      all
      denominated in Canadian dollars. The remaining medium-term debt security has
      a
      maturity of June 7, 2007. Unrealized gains and losses will occur as the market
      interest rate varies. Management does not expect significant gains or losses
      in
      the future due to the relatively short term to maturity of the debt and the
      nature of the trust unit and mutual funds. Management plans to hold this debt
      to
      maturity unless such funds are needed for working capital or other cash needs
      such as the plant refurbishments.




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




Dextran
      Products has a Cdn. $750,000 (U.S. $636,000) (2006 - Cdn. $1,1250,000; U.S.
      $1,097,000) line of credit, of which none was utilized at January 31, 2007
      and
      2006. 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 (2007
      - 6.95%).




The
      decrease in capital lease obligations during fiscal year 2007 was due to
      repayments on capital leases. The majority of the capital lease obligations
      were
      repaid during fiscal year 2007. The Company entered into one new capital lease
      obligation at Dextran Products during fiscal year 2005, for a piece of office
      equipment. Capital lease obligations are due over the next three years.




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




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




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




**Related
      Party Transactions**




In
      August
      1997, the Company loaned Thomas C. Usher, formerly its Vice-Chairman, Director
      of Research and Development, a member of its Board of Directors and the
      beneficial owner of greater than 5% of the outstanding common shares of the
      Company, $691,500 at an interest rate equal to the United States’ bank prime
      rate plus 1.50% (the “Loan”). The Loan was used to partially fund a $1,000,000
      payment to the State of Florida in order to allow Thomas C. Usher to regain
      possession of 430,000 Common Shares of the Company then held by the State as
      collateral security relating to the liquidation of insurance companies formerly
      owned by Thomas C. Usher. Repayment of the Loan is accomplished by 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 Thomas C. Usher as an employee of the Company.
      The amount outstanding under the Loan as of January 31, 2007 was $306,827,
      as
      compared to $323,972 at January 31, 2006, including accrued interest. The
      Company has taken a cumulative provision of $323,490 against accrued interest
      on
      this loan at January 31, 2007, compared to a cumulative provision of $292,860
      at
      January 31, 2006. 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.




20




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, 2007 was
      $130,619, as compared to $207,599 at January 31, 2006. Thomas C. Usher also
      owed
      $250,000 to a subsidiary of the Company, Novadex International Limited, as
      of
      January 31, 2007, pursuant to a non-interest bearing loan with no specific
      repayment terms. The outstanding amount of this loan has not changed from
      January 31, 2006. The amounts continue to remain owing from the estate of Thomas
      C. Usher.




Thomas
      C.
      Usher had pledged 302,409 common shares of the Company as security for these
      amounts owing to the Company. These common shares had a market value of $907,227
      at January 31, 2007, based on the closing price of the Company’s common shares
      on the NASDAQ Capital Market on January 31, 2007. 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, 2007 is $39,519 (2006 - $51,816).




The
      Company also has an outstanding loan payable to Ruth Usher, a member of the
      Board of Directors until her retirement on October 31, 2003, the beneficial
      owner of greater than 5% of the outstanding common shares of the Company, a
      former director, and the widow of Thomas C. Usher. The amount due from the
      Company pursuant to this loan increased to $679,309 at January 31, 2007 from
      $675,919 at January 31, 2006 due to interest charges exceeding monthly payments
      by the Company. The Company is required to make blended monthly payments of
      $6,000 (2006 - $5,000).




**Off-Balance
      Sheet Arrangements**




The
      Company has no off-balance sheet arrangements.




**Tabular
      Disclosure of Contractual Obligations**




As
      of
      January 31, 2007, future minimum cash payments due under contractual
      obligations, including, among others, the Dextran Products line of credit,
      the
      loan payable to Ruth Usher, and capital lease agreements, are as
      follows:





**Payment
                due by period****Less
                than**
            
            
            
            
            
            **More
                than****Contractual
                Obligations**
            
            **Total**
            
            **1
                year**
            
            **1-3
                years**
            
            **3-5
                years**
            
            **5
                years**Long-term
                debt obligations (1)
            
            $
            1,233,705
            
            $
            132,370
            
            $
            264,729
            
            $
            261,883
            
            $
            574,723Capital
                lease obligations (2)
            
            
            18,345
            
            
            6,115
            
            
            12,230
            
            
            —
            
            
            —Operating
                lease obligations (3)
            
            
            3,822
            
            
            546
            
            
            1,092
            
            
            1,092
            
            
            1,092Purchase
                obligations
            
            
            599,030
            
            
            599,030
            
            
            —
            
            
            —
            
            
            —Revolving
                loans (4)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Total
            
            $
            1,854,902
            
            $
            738,061
            
            $
            278,051
            
            $
            262,975
            
            $
            575,815




21




1.
                Consists
                    of:




(a)
            Note
                payable in quarterly payments of Cdn. $419 maturing September 2010;
                and




(b)
            Amounts
                due to shareholder which bear interest at the Canadian banks’ prime
                lending rate plus 1.5%, with required minimum monthly payments, including
                interest, of $6,000.




(c)
            Equipment
                purchase term loan of Cdn $476,351 (US $403,961) 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. $18,027 (US $15,287) 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 ofCdn.
                $161 (US $141) terminating June 2006





4.
            Consists
                of Canadian operating line of credit bearing interest at the Canadian
                banks’ primelending
                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.




***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 years.




22




***Long-Lived
      Assets***




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




***Deferred
      Tax Assets***




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




***The
      Joint Venture***




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




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




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




On
      January 13, 2004, the Company, Chemdex and Vet Labs entered into an Asset
      Purchase Agreement with Sparhawk. Pursuant to the Asset Purchase Agreement,
      the
      Company agreed to sell substantially all of the assets of Vet Labs, including
      its interest in the Joint Venture, to Sparhawk for $5,500,000 in cash. Effective
      March 4, 2004, this sale was completed and a gain of $1,859,471 was recognized.
      Simultaneously with the closing, Chemdex advanced $350,000 to Sparhawk in
      exchange for an unsecured subordinated promissory note bearing interest at
      13%
      per annum and a warrant to purchase 4% of the equity of Sparhawk. The promissory
      note was payable in full on March 4, 2009. On May 31, 2006, payment in full
      for
      principal and interest was received. Interest was payable annually, but could
      be
      deferred and added to the principal balance of the promissory note each year
      at
      Sparhawk’s discretion. 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. In connection with the sale, litigation
      involving the Joint Venture, *Sparhawk
      Laboratories, Inc. v. Veterinary Laboratories, Inc., et al* ,
      Case
      No. 02CV07426, County of Johnson, State of Kansas, was settled, and a Motion
      of
      Approval of Settlement and Stipulation of Dismissal with Prejudice was filed
      with the Court on March 4, 2004.




23




Since
      Sparhawk was thinly capitalized and highly leveraged, the Company had deferred
      $350,000 of the gain relating to the promissory note receivable from Sparhawk.
      Since payment in full on the promissory note was received on May 31, 2006,
      the
      deferred gain of $350,000 was recognized at April 30, 2006 and included in
      other
      income on the statement of  operations.




**Changes
      in Accounting Policies**




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




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.




24





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 Company is currently evaluating the impact of SFAS No.
      159 on its financial statements.




25


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****Fair****1/31/08**
            
            **1/31/09**
            
            **1/31/10**
            
            **1/31/11**
            
            **1/31/12**
            
            **Thereafter**
            
            **Total**
            
            **Value****(US$
                Equivalent)****Assets:**Short-term
                investments:Fixed
                rate ($Cdn.)
            
            
            992,633
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            992,633
            
            
            992,633Average
                interest rate
            
            
            4.14
            %
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            4.14
            %Marketable
                securities:Fixed
                rate ($Cdn.)
            
            
            643,849
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            643,849
            
            
            636,024Average
                interest rate
            
            
            2.86
            %
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2.86
            %**Liabilities:**Long-term
                debt:Fixed
                rate ($Cdn.)
            
            
            8,278
            
            
            5,168
            
            
            5,733
            
            
            —
            
            
            —
            
            
            —
            
            
            19,178
            
            
            25,213Average
                interest rate
            
            
            10.43
            %
            
            10.43
            %
            
            10.43
            %
            
            —
            
            
            —
            
            
            —
            
            
            10.43
            %




26


**Interest
      Rate Sensitivity**




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





**Expected
                Maturity Date****1/31/08**
            
            **1/31/09**
            
            **1/31/10**
            
            **1/31/11**
            
            **1/31/12**
            
            **Thereafter**
            
            **Total**
            
            **Fair**
              **Value****(US$
                Equivalent)****Assets:**Short-term
                investments:Fixed
                rate ($Cdn.)
            
            
            992,633
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            992,633
            
            
            992,633Average
                interest rate
            
            
            4.14
            %
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            4.14
            %Marketable
                   securities:Fixed
                rate ($Cdn.)
            
            
            643,849
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            643,849
            
            
            636,024Average
                interest rate
            
            
            2.86
            %
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2.86
            %Notes
                receivable:Variable
                rate ($US)
            
            
            50,647
            
            
            55,586
            
            
            61,005
            
            
            66,953
            
            
            72,635
            
            
            —
            
            
            306,828
            
            
            306,828Average
                interest rate
            
            
            9.75
            %
            
            9.75
            %
            
            9.75
            %
            
            9.75
            %
            
            9.75
            %
            
            —
            
            
            9.75
            %**Liabilities:**Long-term
                debt:Fixed
                rate ($Cdn.)
            
            
            8,278
            
            
            5,168
            
            
            5,733
            
            
            —
            
            
            —
            
            
            —
            
            
            19,178
            
            
            25,213Average
                interest rate
            
            
            10.43
            %
            
            10.43
            %
            
            10.43
            %
            
            —
            
            
            —
            
            
            —
            
            
            10.43
            %Variable
                rate ($US)
            
            
            109,586
            
            
            112,284
            
            
            115,174
            
            
            118,272
            
            
            121,593
            
            
            259,442
            
            
            836,352
            
            
            836,352Average
                interest rate
            
            
            7.32
            %
            
            7.33
            %
            
            7.34
            %
            
            7.35
            %
            
            7.35
            %
            
            8.95
            %
            
            7.61




27


ITEM
      8. FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA




**Polydex
      Pharmaceuticals Limited**


**Quarterly
      Financial Highlights**


**January
      31, 2007**





**Fourth
                Quarter**
            
            **Third
                Quarter**
            
            **Second
                Quarter**
            
            **First
                Quarter****Fiscal
                Year**
            
            **Fiscal
                Year**
            
            **Fiscal
                Year**
            
            **Fiscal
                Year****2007**
            
            **2006**
            
            **2007**
            
            **2006**
            
            **2007**
            
            **2006**
            
            **2007**
            
            **2006**Sales
                from continuing operations
            
            
            1,842,706
            
            
            1,606,980
            
            
            1,366,190
            
            
            1,062,075
            
            
            1,856,718
            
            
            1,273,470
            
            
            1,433,673
            
            
            1,322,684Gross
                profit
            
            
            72,472
            
            
            107,042
            
            
            208,536
            
            
            72,800
            
            
            231,413
            
            
            126,024
            
            
            320,022
            
            
            123,319Net
                income (loss) from continuing operations
            
            
            (132,304
            )
            
            (663,541
            )
            
            (147,981
            )
            
            (261,451
            )
            
            (219,814
            )
            
            (228,432
            )
            
            239,476
            
            
            (335,629
            )Net
                income (loss) per common share
            
            
            (0.05
            )
            
            (0.22
            )
            
            (0.05
            )
            
            (0.09
            )
            
            (0.07
            )
            
            (0.07
            )
            
            0.08
            
            
            (0.11
            )




28





REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To
      the
      Shareholders of


Polydex
      Pharmaceuticals Limited





We
      have
      audited the accompanying consolidated balance sheets of Polydex Pharmaceuticals
      Limited as of January 31, 2007 and 2006 and the related consolidated statements
      of shareholders’ equity, operations and cash flows for each of the two years
      then ended. These consolidated financial statements are the responsibility
      of
      the Company’s management. Our responsibility is to express an opinion on these
      consolidated financial statements based on our audits. The consolidated
      statements of shareholders’ equity, operations and cash flows of Polydex
      Pharmaceuticals Limited for the year ended January 31, 2005 were audited by
      other auditors whose report dated March 10, 2005, expressed an unqualified
      opinion on those statements.





We
      conducted our 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. 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, 2007 and 2006, and the consolidated results of its
      operations and its cash flows for the two years then ended in conformity with
      generally accepted accounting principles in the United States of
      America.





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








“ SCHWARTZ
      LEVITSKY FELDMAN LLP”


Toronto, Ontario, Canada
            Chartered
                AccountantsApril 9, 2007
            Licensed
                Public
                Accountants





F-1





**REPORT
      OF INDEPENDENT AUDITORS**








To
      the
      Shareholders of


**Polydex
      Pharmaceuticals Limited**





We
      have
      audited the accompanying consolidated balance sheet of **Polydex
      Pharmaceuticals Limited** as
      of
      January 31, 2005 and the related consolidated statements of shareholders'
      equity, operations and cash flows the year then ended. These financial
      statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. We were not engaged to perform
      an
      audit of the Company's internal control over financial reporting. Our 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 also includes examining, on a test basis, evidence
      supporting the amounts and disclosures in the financial statements, assessing
      the accounting principles used and significant estimates made by management,
      and
      evaluating the overall financial statement presentation. We believe that our
      audit provides a reasonable basis for our opinion.





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





Toronto, Canada,
            /s/
                Ernst & Young LLPMarch 10, 2005.
            Chartered
                Accountants





F-2




**Polydex
      Pharmaceuticals Limited**





**CONSOLIDATED
      BALANCE SHEETS**


[Expressed
      in United States dollars]


As
                  at January 31
              
              **2007**
              
              **2006**$
              
              $**Assets****Current**Cash
                  and cash equivalents (note 3)
              
              
              1,384,995
              
              
              971,451Trade
                  accounts receivable (note 18)
              
              
              1,139,186
              
              
              744,720Interest
                  receivable (note 12)
              
              
              -
              
              
              41,511Promissory
                  note receivable (note 12)
              
              
              -
              
              
              -Inventories
                  (note 4)
              
              
              1,338,857
              
              
              1,549,544Prepaid
                  expenses and other current assets
              
              
              100,780
              
              
              129,362**Total
                  current assets**
              
              
              3,963,818
              
              
              3,436,588Property,
                  plant and equipment, net (note 5)
              
              
              4,308,337
              
              
              3,280,724Patents
                  and intangible assets, net (note 6)
              
              
              53,551
              
              
              61,591Assets
                  held for sale
              
              
              -
              
              
              4,390Investments
                  available for sale (note 7)
              
              
              1,437,636
              
              
              2,638,441Due
                  from estate of former shareholder (note 8)
              
              
              363,956
              
              
              488,71110,127,298
              
              
              9,910,445**Liabilities
                  and Shareholders' Equity****Current**Accounts
                  payable
              
              
              1,213,518
              
              
              574,270Accrued
                  liabilities
              
              
              238,493
              
              
              360,150Customer
                  deposits
              
              
              92,757
              
              
              92,932Income
                  taxes payable (note 14)
              
              
              -
              
              
              44,877Current
                  portion of long-term debt (note 10a)
              
              
              32,957
              
              
              1,011Current
                  portion of capital lease obligations (note 10b)
              
              
              4,657
              
              
              168,430Current
                  portion of due to shareholder (note 8)
              
              
              6,000
              
              
              4,597**Total
                  current liabilities**
              
              
              1,588,382
              
              
              1,246,267Long-term
                  debt (note 10a)
              
              
              374,624
              
              
              3,748Capital
                  lease obligations (note 10b)
              
              
              10,902
              
              
              16,108Due
                  to shareholder (note 8)
              
              
              673,309
              
              
              671,322Deferred
                  income taxes (note 14)
              
              
              121,767
              
              
              194,938**Total
                  long-term liabilities**
              
              
              1,180,602
              
              
              886,116**Total
                  liabilities**
              
              
              2,768,984
              
              
              2,132,383Commitments
                  and Contingencies (note 20)**Shareholders'
                  equity**Capital
                  stock (note 11)Authorized:100,000
                  Class A preferred shares of $0.10 each899,400
                  Class B preferred shares of $0.0167 each10,000,000
                  common shares of $0.0167 eachIssued
                  and outstanding:899,400
                  Class B preferred shares (January 31, 2006 - 899,400)
              
              
              15,010
              
              
              15,0103,072,846
                  common shares (January 31, 2006 - 3,058,896)
              
              
              51,185
              
              
              50,953Contributed
                  surplus
              
              
              23,483,659
              
              
              23,400,259Deficit
              
              
              (16,894,033
              )
              
              (16,633,410
              )Accumulated
                  other comprehensive income (notes 19 & 7)
              
              
              702,493
              
              
              945,250**Total
                  shareholders' equity**
              
              
              7,358,314
              
              
              7,778,06210,127,298
              
              
              9,910,445
  *See
          accompanying notes*
  On
          behalf of the Board:
  Director
                  Director
  F-3


**Polydex
      Pharmaceuticals Limited**





**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY**


[Expressed
      in United States dollars]


Years
                  ended January 31, 2007, 2006 and 2005**Accumulated****Other**
              
              **Total****Preferred**
              
              **Common**
              
              **Contributed**
              
              
              
              **Comprehensive**
              
              **Shareholders'****Shares**
              
              **Shares**
              
              **Surplus**
              
              **Deficit**
              
              **Income
                  (Loss)**
              
              **Equity**$
              
              $
              
              $
              
              $
              
              $
              
              $Balance,
                  January 31, 2004
              
              
              15,010
              
              
              50,434
              
              
              23,236,498
              
              
              (16,284,268
              )
              
              (110,343
              )
              
              6,907,331Common
                  share options exercised
              
              
              
              
              
              242
              
              
              53,008
              
              
              
              
              
              
              
              
              53,250Common
                  share options issued
              
              
              
              
              
              
              
              
              14,212
              
              
              
              
              
              
              
              
              14,212Comprehensive
                  income:Net
                  income for the year
              
              
              
              
              
              
              
              
              
              
              
              1,139,911
              
              
              
              
              
              1,139,911Unrealized
                  loss on investments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (15,760
              )
              
              (15,760
              )available
                  for saleCurrency
                  translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              451,945
              
              
              451,945Balance,
                  January 31, 2005
              
              
              15,010
              
              
              50,676
              
              
              23,303,718
              
              
              (15,144,357
              )
              
              325,842
              
              
              8,550,889Common
                  share options exercised
              
              
              
              
              
              277
              
              
              82,517
              
              
              
              
              
              
              
              
              82,794Common
                  share options issued
              
              
              
              
              
              
              
              
              14,024
              
              
              
              
              
              
              
              
              14,024Comprehensive
                  income:Net
                  loss for the year
              
              
              
              
              
              
              
              
              
              
              
              (1,489,053
              )
              
              
              
              
              (1,489,053
              )Unrealized
                  loss on investmentsavailable
                  for sale
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (12,349
              )
              
              (12,349
              )Currency
                  translation adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              631,757
              
              
              631,757Balance,
                  January 31, 2006
              
              
              15,010
              
              
              50,953
              
              
              23,400,259
              
              
              (16,633,410
              )
              
              945,250
              
              
              7,778,062Common
                  share options exercised
              
              
              
              
              
              232
              
              
              38,879
              
              
              
              
              
              
              
              
              39,111Common
                  share options issued
              
              
              
              
              
              
              
              
              44,521
              
              
              
              
              
              
              
              
              44,521Comprehensive
                  income:Net
                  loss for the year
              
              
              
              
              
              
              
              
              
              
              
              (260,623
              )
              
              
              
              
              (260,623
              )Unrealized
                  loss on investmentsavailable
                  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





*See
      accompanying notes*


F-4


**Polydex
      Pharmaceuticals Limited**





**CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)**


[Expressed
      in United States dollars]


Year
                  ended January 31
              
              **2007**
              
              **2006**
              
              **2005**$
              
              $
              
              **$****Sales**
              
              
              6,499,287
              
              
              5,265,209
              
              
              6,372,359Cost
                  of goods sold
              
              
              5,666,844
              
              
              4,836,024
              
              
              4,855,941**Gross
                  profit**
              
              
              832,443
              
              
              429,185
              
              
              1,516,418**Expenses**General
                  and administrative (note 11b)
              
              
              1,205,874
              
              
              1,421,159
              
              
              1,465,849Research
                  and development (note 13)
              
              
              214,865
              
              
              205,801
              
              
              114,742Selling
                  and promotion
              
              
              171,086
              
              
              129,576
              
              
              128,731Interest
                  expense,net (note 8)
              
              
              94,790
              
              
              81,509
              
              
              91,210Depreciation
              
              
              42,186
              
              
              61,160
              
              
              36,365Amortization
              
              
              -
              
              
              -
              
              
              8,518Foreign
                  exchange gain
              
              
              (22,857
              )
              
              (18,139
              )
              
              (46,172
              )Gain
                  on sale of veterinary products assets (note 12)
              
              
              -
              
              
              -
              
              
              (1,859,471
              )Loss
                  (gain) on sale of assets
              
              
              (20
              )
              
              4,581
              
              
              -Interest
                  and other income (note 12)
              
              
              (497,663
              )
              
              (148,166
              )
              
              (130,131
              )Total
                  expenses (income)
              
              
              1,208,261
              
              
              1,737,481
              
              
              (190,359
              )Income
                  (loss) before income taxes
              
              
              (375,818
              )
              
              (1,308,296
              )
              
              1,706,777Provision
                  for (recovery of) income taxes (note 14)
              
              
              (115,195
              )
              
              180,757
              
              
              566,866**Net
                  income (loss) for the year**
              
              
              (260,623
              )
              
              (1,489,053
              )
              
              1,139,911Unrealized
                  loss on investments available for sale
              
              
              (1,321
              )
              
              (12,349
              )
              
              (15,760
              )Currency
                  translation adjustment
              
              
              (241,436
              )
              
              631,757
              
              
              451,945Comprehensive
                  income (loss) for the period
              
              
              (503,380
              )
              
              (869,645
              )
              
              1,576,096Per
                  share information:Earnings
                  (loss) per common share:Basic
              
              
              (0.09
              )
              
              (0.49
              )
              
              0.38Diluted
              
              
              (0.09
              )
              
              (0.49
              )
              
              0.37Weighted
                  average number of common shares used incomputing
                  net earnings per share for the period:Basic
              
              
              3,063,884
              
              
              3,052,296
              
              
              3,037,463Diluted
              
              
              3,063,884
              
              
              3,052,296
              
              
              3,037,463****
  *See
        accompanying notes*
  F-5


**Polydex
      Pharmaceuticals Limited**





**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


[Expressed
      in United States dollars]


Year
                  ended January 31
              
              **2007**
              
              **2006**
              
              **2005**$
              
              $
              
              $Cash
                  provided by (used in):Operating
                  activities:Net
                  income (loss) for the period
              
              
              (260,623
              )
              
              (1,489,053
              )
              
              1,139,911Add
                  (deduct) items not affecting cash:Depreciation
                  and amortization
              
              
              547,297
              
              
              543,023
              
              
              513,095Imputed
                  interest on long-term debt
              
              
              -
              
              
              1,363
              
              
              14,648Writedown
                  of assets held for sale
              
              
              4,410
              
              
              -
              
              
              -Deferred
                  income taxes
              
              
              (69,140
              )
              
              121,478
              
              
              417,003Amortization
                  of premium on investments available for sale
              
              
              471
              
              
              28,005
              
              
              -(Gain)
                  Loss on disposal of equipment
              
              
              (4,430
              )
              
              4,581
              
              
              3,586Gain
                  on sale of veterinary products business (note 12)
              
              
              
              
              
              
              
              
              (1,859,471
              )Licence
                  fee charged to due from shareholder
              
              
              76,978
              
              
              73,740
              
              
              81,179Options
                  issued in exchange for services (note 11b)
              
              
              44,520
              
              
              14,024
              
              
              14,212Net
                  change in non-cash working capital balancesrelated
                  to operations (note 15)
              
              
              322,124
              
              
              277,654
              
              
              (634,514
              )**Cash
                  provided by (used in) operating activities**
              
              
              661,607
              
              
              (425,185
              )
              
              (310,351
              )**Investing
                  activities:**Additions
                  to property, plant and equipment and patents
              
              
              (1,724,440
              )
              
              (418,246
              )
              
              (159,554
              )Proceeds
                  from sale of veterinary products business (note 12)
              
              
              -
              
              
              -
              
              
              4,599,218Decrease
                  in due from shareholder
              
              
              47,777
              
              
              77,718
              
              
              65,960Decrease
                  in accrued interest on investments
              
              
              57,580
              
              
              -
              
              
              -Unrealized
                  gain on commercial paper available for sale
              
              
              9,469
              
              
              -
              
              
              -Proceeds
                  (Acquisition) of investments available for sale
              
              
              1,123,669
              
              
              (567,942
              )
              
              (1,841,854
              )Proceeds
                  from sale of equipment
              
              
              4,430
              
              
              3,748
              
              
              5,148**Cash
                  provided by (used in) investing activities**
              
              
              (481,515
              )
              
              (904,722
              )
              
              2,668,918**Financing
                  activities:**Repayment
                  of long-term debt
              
              
              (21,876
              )
              
              (47,745
              )
              
              (296,035
              )Proceeds
                  from long-term debt
              
              
              -
              
              
              -
              
              
              5,383Repayment
                  of capital lease obligations
              
              
              (169,218
              )
              
              (162,873
              )
              
              (167,531
              )Increase
                  (decrease) in due to shareholder
              
              
              3,390
              
              
              (5,385
              )
              
              (1,930
              )Increase
                  (decrease) in long-term bank indebtedness
              
              
              441,034
              
              
              (24,170
              )
              
              (147,140
              )Exercise
                  of common share options
              
              
              39,113
              
              
              82,794
              
              
              53,250**Cash
                  provided by (used in) financing activities**
              
              
              292,443
              
              
              (157,379
              )
              
              (554,003
              )Effect
                  of exchange rate changes on cash
              
              
              (58,991
              )
              
              57,686
              
              
              224,959**Net
                  increase (decrease) in cash and cash equivalents**
              
              
              413,544
              
              
              (1,429,600
              )
              
              2,029,523Cash
                  and cash equivalents, beginning of year
              
              
              971,451
              
              
              2,401,051
              
              
              371,528**Cash
                  and cash equivalents, end of year**
              
              
              1,384,995
              
              
              971,451
              
              
              2,401,051Cash
                  and cash equivalents is comprised of the following:Cash
              
              
              382,419
              
              
              236,422
              
              
              129,818Short-term
                  deposits
              
              
              1,002,576
              
              
              735,029
              
              
              2,271,2331,384,995
              
              
              971,451
              
              
              2,401,051





*See
      accompanying notes*




F-6
 
 **Polydex Pharmaceuticals
                  Limited****NOTES
                    TO CONSOLIDATED FINANCIAL
                    STATEMENTS**[Expressed
                    in United States dollars except where
                    otherwise noted]January 31, 2007 and
                  2006


**1.
      GENERAL**





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





**2.
      SIGNIFICANT ACCOUNTING POLICIES**





**Basis
      of consolidation**





The
      consolidated financial statements include the accounts of the Company and its
      subsidiaries, all 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 cost 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 labour and fixed and variable overhead
      expenses.





**Investments
      available for sale**





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




F-7




**Polydex Pharmaceuticals
              Limited****NOTES
                TO CONSOLIDATED FINANCIAL
                STATEMENTS**[Expressed
                in United States dollars except where
                otherwise noted]January 31, 2007 and
              2006




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





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





Buildings
            
            
            15
                yearsMachinery
              and equipment
            
            
            3
                to
                10 years





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





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





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





**Revenue
      recognition**





All
      revenue is from sales of bulk 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.




F-8
 
  **Polydex Pharmaceuticals
                Limited****NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS**[Expressed
                  in United States dollars except where
                  otherwise noted]January 31, 2007 and
                2006





**Research
      and development**





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





**Foreign
      currency translation**





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





F-9
 
  **Polydex Pharmaceuticals
                Limited****NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS**[Expressed
                  in United States dollars except where
                  otherwise noted]January 31, 2007 and
                2006





**Earnings
      (loss) per common share**





Basic
      earnings (loss) per common share is computed using the weighted average number
      of shares outstanding of 3,063,884 for the year ended January 31, 2007 (2006
      -
      3,052,296; 2005 - 3,037,463). Diluted earnings (loss) per common share is
      computed using the weighted average number of shares outstanding adjusted for
      the incremental shares, using the treasury stock method, attributed to
      outstanding options to purchase common stock. No incremental shares in 2007
      and
      2006 (2005 - 26,265), were used in the calculation of diluted earnings (loss)
      per common share. Options to purchase 14,562, 13,027 and 26,265 common shares
      in
      2007, 2006 and 2005, respectively, were not included in the computation of
      diluted earnings (loss) per common share because their effect was
      anti-dilutive.





**3.
      CASH AND CASH EQUIVALENTS**





Cash
      and
      cash equivalents consist of the following:


2007
              
              2006$
              
              $Cash
              
              
              382,419
              
              
              236,422Short-term
                  deposits
              
              
              1,002,576
              
              
              735,0291,384,995
              
              
              971,451





Short-term
      deposits in the amount of Cdn. $1,181,043 have maturities of less than three
      months at the date of purchase. Interest rates on the short-term deposits range
      from 4.04% to 4.31%.





**4.
      INVENTORIES**





Inventories
      consist of the following:


2007
              
              2006$
              
              $Finished
                  goods
              
              
              792,128
              
              
              1,108,626Work-in-process
              
              
              364,338
              
              
              285,422Raw
                  materials
              
              
              182,391
              
              
              155,4961,338,857
              
              
              1,549,544




F-10
 
  **Polydex Pharmaceuticals
                Limited****NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS**[Expressed
                  in United States dollars except where
                  otherwise noted]January 31, 2007 and
                2006





**5.
      PROPERTY, PLANT AND EQUIPMENT**





Property,
      plant and equipment consist of the following:


**2007**
              
              **2006****Net**
              
              
              
              
              
              **Net****Accumulated**
              
              **book**
              
              
              
              **Accumulated**
              
              **book****Cost**
              
              **depreciation**
              
              **value**
              
              **Cost**
              
              **depreciation**
              
              **value**$
              
              $
              
              $
              
              $
              
              $
              
              $Land
                  and buildings
              
              
              **3,298,075**
              
              
              **825,091**
              
              
              **2,472,984**
              
              
              1,788,720
              
              
              762,183
              
              
              1,026,537Machinery
                  and equipment
              
              
              **8,292,772**
              
              
              **6,457,419**
              
              
              **1,835,353**
              
              
              8,498,352
              
              
              6,244,165
              
              
              2,254,187**11,590,847**
              
              
              **7,282,510**
              
              
              **4,308,337**
              
              
              10,287,072
              
              
              7,006,348
              
              
              3,280,724





Included
      in machinery and equipment are assets under capital lease with a total cost
      of
      $1,025,707 (2006 - $1,061,909) and accumulated depreciation of $678,429 (2006
      -
      $593,406). Depreciation of assets under capital lease is included in cost of
      goods sold. Depreciation of $505,111 was charged to cost of sales in fiscal
      2007
      (2006- $481,863). Assets not available for use amounted to $ 1,943,142
      (2006 - $346,856).





**6.
      PATENTS AND INTANGIBLE ASSETS**





Patents
      and intangible assets consist of the following:


**2007**
              ****
              **2006**$
              
              $Cost
              
              
              **80,341**
              
              
              80,341Less
                  accumulated amortization
              
              
              **26,790**
              
              
              18,750**53,551**
              
              
              61,591





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




F-11
 
  **Polydex Pharmaceuticals
                Limited****NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS**[Expressed
                  in United States dollars except where
                  otherwise noted]January 31, 2007 and
                2006





**7.
      INVESTMENTS AVAILABLE FOR SALE**





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


**2007**
              ****
              **2006**$
              
              $Debt
                  security in the amount of Cdn. $750,000 from General Motors Acceptance
                  Corp. maturing on June 7, 2007; floating rate interest is paid
                  quarterly
              
              
              **636,024**
              
              
              623,44843,628
                  units (2006-42,752) of DFA Fixed Income Fundyielding
                  4.54%
              
              
              **344,081**
              
              
              349,454TD
                  short term bond fund consisting of Canadian government andcorporate
                  bonds maturing in the next 1-5 years
              
              
              **284,469**
              
              
              —12,500
                  capital income trust index units, yielding 8.7%
              
              
              **90,633**
              
              
              —4,000
                  preferred shares of Diversified preferred share trust
                  units
              
              
              **82,429**Debt
                  security in the amount of Cdn. $920,649 from the Bank of Nova Scotia
                  yielding 3.35%, matured June 7, 2006
              
              
              **—**
              
              
              801,752Debt
                  security in the amount of Cdn. $718,000 from GE Capital Canada
                  bearing
                  interest at 4.35% and matured February 6, 2006
              
              
              —
              
              
              639,29215,000
                  units of Barclays Top 100 Equal Weighted Income Fund
              
              
              —
              
              
              144,60110,000
                  units of Citadel Stables Series 1 Income fund
              
              
              —
              
              
              79,894**1,437,636**
              
              
              2,638,441





As
      at
      January 31, 2007, accumulated other comprehensive income includes unrealized
      losses on debt securities available for sale of $5,391 (2006 - $18,918) and
      unrealized losses on income fund trust units of $34,608 (2006-$11,752 of
      unrealized gains).





**8.
      RELATED PARTY TRANSACTIONS**





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


**2007**
              ****
              **2006**$
              
              $Amounts
                  due from estate of former shareholder [i]
              
              
              **363,956**
              
              
              488,711Amounts
                  due to shareholder [ii]
              
              
              **(679,309**
              **)**
              
              (675,919
              )





[i]
                Amounts
                    due from estate of former shareholder (the “Estate”) bear interest at the
                    United States banks prime lending rate plus 1.5% (2007 - 9.75%;
                    2006 -
                    8.76%), except for an amount of $380,619 (2006 - $457,599) which
                    is
                    non-interest bearing. Interest income on this loan is recognized
                    when
                    realized. These amounts have no fixed terms of repayment. The
                    Estate has
                    pledged 302,409 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 2007, $76,978 (2006 - $73,471;
                    2005 -
                    $78,168) 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, 2007, a balance of $39,519 is still to be paid
                    to the
                    Estate. See also “Iron Dextran Process” under Note
                    13.




F-12
 
  **Polydex Pharmaceuticals
                Limited****NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS**[Expressed
                  in United States dollars except where
                  otherwise noted]January 31, 2007 and
                2006




[ii]
            Amounts
                due to shareholder bear interest at the United States banks prime
                lending
                rate plus 1.5% (2007 - 9.75%; 2006 - 8.76%). The Company is required
                to
                make monthly payments, inclusive of accrued interest, of $6,000.
                Based on
                the current rate of interest, the principal repayment on this loan
                for
                fiscal 2007 would be approximately $6,000. This loan may not be
                called.





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


**2007**
              
              **2006**
              
              **2005**$
              
              $
              
              **$**Interest
                  expense
              
              
              **64,390**
              
              
              53,113
              
              
              37,569





**9.
      BANK INDEBTEDNESS**





The
      Company has a Canadian operating line of credit of Cdn. $750,000 (U.S. $636,024)
      (2006 - Cdn. $1,250,000; U.S. $1,097,000), none of which was utilized
      at January 31, 2007 (2006 - Nil). The Canadian line of credit bears
      interest at the Canadian banks' prime lending rate plus 0.75% (2007 - 6.00%;
      2006 - 5.25%). During March 2006, a term loan of Cdn $500,000 (U.S. $424,016)
      was obtained for the purchase of equipment, bearing interest of 6.95%. Bank
      indebtedness is collateralized by a general security agreement over the
      Company's assets and a collateral mortgage of $500,000 on the Dextran Products
      Limited ("Dextran Products") building.





During
      November 2004, the Company entered into United States dollar forward foreign
      exchange contracts with the bank to lock in an exchange rate for converting
      United States dollars to Canadian dollars. The Company was committed to selling
      $150,000 per month for the period from February 2005 to April 2005 at an
      exchange rate of $1.1772. At January 31, 2005, the net unrealized loss in
      respect of these foreign currency contracts amounted to $23,203, which was
      included in the foreign exchange gain (loss) on the consolidated statements
      of
      operations. There are no foreign exchange contracts outstanding at January
      31,
      2006 and 2007





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





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


**2007**
              
              **2006**$
              
              $Note
                  payable in blended quarterly payments of Cdn. $419 (U.S. $355),
                  bearing
                  interest at a fixed rate of 10%,maturing
                  September 10, 2010, with the vendor holding a security interest
                  in the
                  equipment
              
              
              **3,620**
              
              
              4,759Bank
                  term loan (note 9) payable in monthly installments ofCdn.
                  $5,792 (U.S. $4,912) principal and interest at the Canadian banks’’ prime
                  lending rate plus 0.75% (2007 - 6.95%), maturing May
                  2016
              
              
              **403,961**
              
              
              —**407,581**
              
              
              4,759Less
                  current portion
              
              
              **32,957**
              
              
              1,011**374,624**
              
              
              3,748Interest
                  expense for the year for long-term debt was $22,913 (2006 - $533
                  )
   F-13
 
  **Polydex Pharmaceuticals
                  Limited****NOTES
                    TO CONSOLIDATED FINANCIAL
                    STATEMENTS**[Expressed
                    in United States dollars except where
                    otherwise noted]January 31, 2007 and
                  2006





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


$2008
              
              
              32,9572009
              
              
              35,3902010
              
              
              37,9472011
              
              
              39,2402012
              
              
              42,056Thereafter
              
              
              219,991407,581




[b] Capital
      lease obligations consist of the following:


**2007**
              
              **2006**$
              
              $Obligation
                  (Cdn. $18,347) under a capital lease, repayable in quarterly instalments,
                  bearing interest at 10.43% and maturing December 2009. The Company
                  has an
                  option to purchase the asset for fair value at the end of the lease
                  term
              
              
              **15,559**
              
              
              20,455Obligation
                  under a capital lease, repaid in monthly instalments, bearing interest
                  at
                  9% and maturing November 2006, at which time the Company exercised
                  an
                  option to purchase the asset for $1.
              
              
              —
              
              
              135,399Obligation
                  under a capital lease, repaid in monthly instalments, bearing interest
                  at
                  7.59% and maturing November 2006, at which time the Company exercised
                  an
                  option to purchase the asset for $1.
              
              
              —
              
              
              28,684**15,559**
              
              
              184,538Less
                  current portion
              
              
              **4,657**
              
              
              168,430**10,902**
              
              
              16,108




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


$2008
              
              
              6,1152009
              
              
              6,1152010
              
              
              6,115Total
                  minimum lease payments
              
              
              18,345Less
                  amount representing imputed interest
              
              
              2,78615,559Interest
                  expense for the year for capital lease obligations was $9,199 (2006
                  -
                  $23,541 )




F-14
 
  **Polydex Pharmaceuticals
                Limited****NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS**[Expressed
                  in United States dollars except where
                  otherwise noted]January 31, 2007 and
                2006





**11.
      CAPITAL STOCK**





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





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





The
      Class
      A preferred shares will carry dividends, will be convertible into common shares
      of the Company and will be redeemable, 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, 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.





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





**[b]**
            **Share
                option plan**





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





All
      options granted have a term of five years and vest immediately. At
      January 31, 2007, the Company has 37,725 options outstanding at exercise
      prices ranging from $2.50 to $10.01 and a weighted average exercise price of
      $5.64. The options, which are immediately exercisable and expire on dates
      between January 31, 2008 and January 31, 2012, entitle the holder of an option
      to acquire one common share of the Company.





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.




F-15
 
  **Polydex Pharmaceuticals
                Limited****NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS**[Expressed
                  in United States dollars except where
                  otherwise noted]January 31, 2007 and
                2006





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.





During
      the year ended January 31, 2005, 4,365 common share options were issued to
      the
      independent directors of the Company. These options were valued at $14,212
      and
      were 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 3.71%; dividend yield of nil; volatility factor of the expected
      market price of the Company's common stock of 0.681, and an expected life of
      five years.





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


**Share
                  options**
              
              **Weighted
                  average exercise price per
                  share******************
              ********
              ****
              **2007**
              ****
              **2006**
              ****
              **2005**
              ****
              **2007**
              ****
              **2006**
              ****
              **2005**
              ********
              ****
              **#**
              ****
              **#**
              ****
              **#**
              ****
              $
              
              $
              
              $**Options
                  outstanding,**
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ******beginning
                  of year**
              ****
              ****
              **42,175**
              
              
              86,300
              
              
              427,935
              
              
              **4.24**
              
              
              4.75
              
              
              3.92Granted
              
              
              **13,500**
              
              
              3,975
              
              
              4,365
              
              
              **6.89**
              
              
              7.52
              
              
              6.86Exercised
              
              
              **(13,950**
              **)**
              
              (16,600
              )
              
              (14,500
              )
              
              **2.80**
              
              
              4.99
              
              
              3.67Expired
              
              
              **(4,000**
              **)**
              
              (31,500
              )
              
              (331,500
              )
              
              **5.00**
              
              
              5.66
              
              
              3.75**Options
                  outstanding,**
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ****
              ******end
                  of year**
              
              
              **37,725**
              
              
              42,175
              
              
              86,300
              
              
              **5.64**
              
              
              4.24
              
              
              4.75**Weighted
                  average fair****value
                  of options granted****during
                  the year**
              
              
              
              
              
              
              
              
              
              
              **$**
              **4.12**
              
              $
              3.53
              
              $
              3.26





The
      following table summarizes information relating to the options outstanding
      at
      January 31, 2007:


**Weighted
                  average****Exercise**
              
              **Number**
              
              **remaining****price**
              
              **outstanding**
              
              **contractual
                    life**$
              
              
              
              [months]**2.50**
              
              
              **12,000**
              
              
              **12****3.00**
              
              
              **6,000**
              
              
              **60****6.86**
              
              
              **4,365**
              
              
              **36****7.52**
              
              
              **3,975**
              
              
              **48****7.72**
              
              
              **3,885**
              
              
              **24****10.01**
              
              
              **7,500**
              
              
              **54****37,725**
              
              
              **36**
  F-16
 
  **Polydex Pharmaceuticals
                  Limited****NOTES
                    TO CONSOLIDATED FINANCIAL
                    STATEMENTS**[Expressed
                    in United States dollars except where
                    otherwise noted]January 31, 2007 and
                  2006


**12.
      VETERINARY LABORATORIES, INC.**





**Sparhawk
      Laboratories, Inc.**




In
      1992,
      Veterinary Laboratories, Inc. ("Vet Labs") and Sparhawk Laboratories, Inc.
      ("Sparhawk") entered into the Vet Labs - Sparhawk Joint Venture (the "Joint
      Venture") for the manufacture and sale of veterinary pharmaceutical products.
      Vet Labs and Sparhawk each owned 50% of the Joint Venture. The Company
      controlled the Joint Venture through its control of the Joint Venture Policy
      Committee and therefore consolidated its assets, liabilities, revenue and
      expenses in 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-17
 
  **Polydex Pharmaceuticals
                Limited****NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS**[Expressed
                  in United States dollars except where
                  otherwise noted]January 31, 2007 and
                2006





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





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


**2007**
              
              **2006**
              
              **2005**$
              
              $
              
              **$**Research
                  and development expenditures
              
              
              **214,865**
              
              
              215,482
              
              
              127,847Investment
                  tax credits
              
              
              **—**
              
              
              (9,681
              )
              
              (13,105
              )**Research
                  and development expense**
              
              
              **214,865**
              
              
              205,801
              
              
              114,742





**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 $76,978
      [2006 - $73,471; 2005 - $78,168]. 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,
      2006, the Company made payments of $26,000. A final payment of $38,668 is due
      upon completion of the clinical study. In March of 2006, the Company also
      entered into an agreement for the monitoring of the clinical trial at cost
      of
      $31,986. Both of these amounts are yet to be paid since the final report has
      not
      been completed. The Company expects to make such payments in fiscal
      2008.




F-18
 
  **Polydex Pharmaceuticals
                Limited****NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS**[Expressed
                  in United States dollars except where
                  otherwise noted]January 31, 2007 and
                2006





**14.
      INCOME TAXES**




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





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


**2007**
              
              **2006**
              
              **2005**$
              
              $
              
              **$**Bahamas
              
              
              **(244,022**
              **)**
              
              (185,653
              )
              
              (642,870
              )Canada
              
              
              **(510,970**
              **)**
              
              (1,088,398
              )
              
              250,863United
                  States
              
              
              **379,174**
              
              
              (34,245
              )
              
              2,098,784**(375,818**
              **)**
              
              (1,308,296
              )
              
              1,706,777





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:


**2007**
              
              **2006**
              
              **2005**$
              
              $
              
              **$**Foreign
                  witholding taxes and other on Bahamian income
              
              
              —
              
              
              —
              
              
              123,000Provision
                  for (recovery of) income taxes based onCanadian
                  statutory income tax rates
              
              
              **(189,059**
              **)**
              
              (370,055
              )
              
              92,819Foreign
                  withholding taxes
              
              
              **—**
              
              
              56,601
              
              
              —Decrease
                  in tax reserve
              
              
              **(46,055**
              **)**
              
              —
              
              
              (232,739
              )Increase
                  (decrease) in valuation allowance
              
              
              **81,833**
              
              
              651,107
              
              
              (36,009
              )Tax
                  and exchange rate changes on deferred tax items
              
              
              **(3,554**
              **)**
              
              (13,343
              )
              
              4,654Items
                  not deductible for tax
              
              
              **41,640**
              
              
              (19,603
              )
              
              (21,859
              )**(115,195**
              **)**
              
              304,707
              
              
              (193,134
              )Provision
                  for (recovery of) income taxes based onUnited
                  States income tax rates
              
              
              **140,294**
              
              
              (12,671
              )
              
              776,550Tax
                  recovery on Joint Venture partner'sshare
                  of income
              
              
              **—**
              
              
              —
              
              
              (160,697
              )Tax
                  on non-deductible items
              
              
              **—**
              
              
              —
              
              
              (23,511
              )Increase
                  (decrease) in valuation allowance
              
              
              **(140,294**
              **)**
              
              (111,279
              )
              
              44,658—
              
              
              (123,950
              )
              
              637,000**Provision
                  for (recovery of) income taxes**
              
              
              **(115,195**
              **)**
              
              180,757
              
              
              566,866
  F-19
 
  **Polydex Pharmaceuticals
                  Limited****NOTES
                    TO CONSOLIDATED FINANCIAL
                    STATEMENTS**[Expressed
                    in United States dollars except where
                    otherwise noted]January 31, 2007 and
                  2006





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


**2007**
              
              **2006**
              
              **2005**$
              
              $
              
              **$**Canadian
                  deferred tax recovery
              
              
              **(69,140**
              **)**
              
              (183,285
              )
              
              (280,453
              )Canadian
                  deferred tax expense
              
              
              **—**
              
              
              304,763
              
              
              197,456Canadian
                  current tax expense (recovery)
              
              
              **(46,055**
              **)**
              
              183,229
              
              
              12,863United
                  States deferred tax expense
              
              
              **—**
              
              
              —
              
              
              500,000United
                  States current tax expense
              
              
              **—**
              
              
              —
              
              
              137,000United
                  States current tax recovery
              
              
              **—**
              
              
              (123,950
              )
              
              —**(115,195**
              **)**
              
              180,757
              
              
              566,866





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


**2007**
              
              **2006**
              
              **2005**$
              
              $
              
              **$****Deferred
                  tax assets**CanadianNon-capital
                  losses
              
              
              **1,120,327**
              
              
              1,054,054
              
              
              —Unclaimed
                  research and development expenses
              
              
              **285,444**
              
              
              295,518
              
              
              255,485Net
                  capital losses [note 14[c]]
              
              
              **164,976**
              
              
              188,353
              
              
              140,173Other
                  items
              
              
              **15,160**
              
              
              27,733
              
              
              84,566United
                  StatesNet
                  operating loss carryforwards
              
              
              **42,981**
              
              
              84,371
              
              
              —Unpaid
                  intercompany interest
              
              
              **—**
              
              
              —
              
              
              149,706Allowance
                  on Sparhawk note [note 12]
              
              
              **—**
              
              
              84,206
              
              
              84,206**1,628,888**
              
              
              1,734,235
              
              
              714,136Less
                  valuation allowance
              
              
              **1,628,888**
              
              
              1,734,235
              
              
              421,160—
              
              
              —
              
              
              292,976**Deferred
                  tax liabilities**Excess
                  of carrying value over tax value ofdepreciable
                  assets
              
              
              **(119,097**
              **)**
              
              (185,353
              )
              
              (214,560
              )Investment
                  tax credits and other items
              
              
              **(2,670**
              **)**
              
              (9,585
              )
              
              (143,715
              )**Net
                  deferred tax liabilities**
              
              
              **(121,767**
              **)**
              
              (194,938
              )
              
              (65,299
              )





[c]
            The
                Canadian subsidiaries have non-capital loss carryforwards available
                to
                reduce future years’ income for tax purposes totaling approximately
                $2,635,000. These non-capital losses expire from 2008 to 2017.





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 $1,049,000 and $563,000
      for
      federal and provincial purposes, respectively. Certain Canadian subsidiaries
      also have net capital losses available for carryforward of approximately
      $478,000 available to offset future taxable capital gains. These potential
      deductions and net capital losses have an indefinite carryforward
      period.




F-20
 
  **Polydex Pharmaceuticals
                Limited****NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS**[Expressed
                  in United States dollars except where
                  otherwise noted]January 31, 2007 and
                2006





[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.





**15.
      CONSOLIDATED STATEMENTS OF CASH FLOWS**





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


**2007**
              
              **2006**
              
              **2005**$
              
              $
              
              **$****Decrease
                  (increase) in current assets**Trade
                  accounts receivable
              
              
              **(436,313**
              **)**
              
              246,607
              
              
              (371,170
              )Interest
                  receivable
              
              
              **41,511**
              
              
              —
              
              
              (41,511
              )Inventories
              
              
              **164,193**
              
              
              98,154
              
              
              (196,214
              )Prepaid
                  expenses and other current assets
              
              
              **26,287**
              
              
              (7,926
              )
              
              (69,916
              )**(204,322**
              **)**
              
              **336,835**
              
              
              **(678,811**
              **)****Increase
                  (decrease) in current liabilities**Accounts
                  payable
              
              
              **685,309**
              
              
              66,247
              
              
              (83,326
              )Accrued
                  liabilities
              
              
              **(117,143**
              **)**
              
              (27,892
              )
              
              12,274Customer
                  deposits
              
              
              **3,113**
              
              
              (13,006
              )
              
              (13,190
              )Income
                  taxes payable
              
              
              **(44,833**
              **)**
              
              (84,530
              )
              
              128,539**322,124**
              
              
              277,654
              
              
              (634,514
              )




Cash
      paid
      during the year for interest was $89,365 (2006 - $27,033; 2005 - $38,993).
      Cash
      paid during the year for income taxes was $ Nil (2006 - $3,891; 2005 -
      $6,433).





There
      were no capital equipment acquisitions under capital leases for the year ended
      January 31, 2007 and 2006. For the year ended January 31, 2005, capital
      equipment acquired under capital lease of $23,137 was treated as non-cash
      additions.





**16.
      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 *[note
      12]* .
      Until
      March 4, 2004, each subsidiary comprised a reportable segment as
      follows:




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





·
              Chemdex
                  - manufactured and sold veterinary pharmaceutical products and
                  specialty
                  chemicals in the United States. The primary customers were distributors
                  and private labelers, who in turn sold to the end user of these
                  products.




F-21
 
  **Polydex Pharmaceuticals
                Limited****NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS**[Expressed
                  in United States dollars except where
                  otherwise noted]January 31, 2007 and
                2006





After
      March 4, 2004, Chemdex only sells bulk quantities of a specific dextran
      derivative to Sparhawk under the Supply Agreement, as described in *note
      12* .
      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 from
      the
      prior periods has therefore been restated to conform to this basis of
      reporting.





**2007**
              **$**
            
            **2006**
              **$**
            
            **2005**
              **$****Total
                revenue by significant customer:****Customer
                A**
              **Customer
                B**
              **Customer
                C**
              **Customer
                D**
            
            
            **1,296,702**
              **780,039**
              **668,001**
              **618,878**
            
            
            1,111,402
              452,820
              379,342
              534,222
            
            
            886,749
              400,360
              425,860
              492,884**3,363,620**
            
            
            2,477,786
            
            
            2,205,853








**2007**
              **$**
            
            **2006**
              **$**
            
            **2005**
              **$****Sales
                by geographic destination:****Europe**
              **United
                States**
              **Other**
              **Canada**
              **Pacific
                Rim**
            
            
            **2,796,710**
              **1,283,251**
              **943,768**
              **893,977**
              **581,581**
            
            
            2,237,430
              1,086,243
              635,490
              512,031
              794,015
            
            
            2,130,180
              1,950,761
              562,557
              854,989
              873,872**$**
            **6,499,287**
            
            $
            5,265,209
            
            $
            6,372,359





F-22
 
  **Polydex Pharmaceuticals
                Limited****NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS**[Expressed
                  in United States dollars except where
                  otherwise noted]January 31, 2007 and
                2006





**17.
      FAIR VALUE OF FINANCIAL INSTRUMENTS**





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





The
      carrying values of cash and cash equivalents, trade accounts receivable,
      interest receivable and accounts payable approximate their fair values as at
      January 31, 2007 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, 2007 and
      2006. The estimated fair value of the amount due from shareholder is not
      determinable because the amount has no fixed terms of repayment.





**18.
      OTHER DISCLOSURES**





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





As
      at
      January 31, 2007, four (2006 - three) customers of the Company comprised 68%
      (2006 - 71%) of the trade accounts receivable balance. No other customers had
      trade accounts receivable outstanding at yearend that represented more than
      10%
      of the Company's trade accounts receivable balance.





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





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





**19.
      ACCUMULATED OTHER COMPREHENSIVE INCOME**





The
      components of other accumulated comprehensive income are as
      follows:


**2007**
              
              **2006**$
              
              $Unrealized
                  losses on investments available for sale
              
              
              **(13,670**
              **)**
              
              (12,349
              )Currency
                  translation
              
              
              **716,163**
              
              
              957,599**Accumulated
                  other comprehensive income**
              
              
              **702,493**
              
              
              945,250





**20.
      COMMITMENTS AND CONTINGENCIES**





As
      at
      January 31, 2007, the Company had commitments of $545,488 (2006 -
      $118,555) for capital expenditures related to the plant refurbishment at
      Dextran Products in Toronto, and $53,542 (2006 - $70,654) for other
      commitments.




F-23
 
  **Polydex Pharmaceuticals
                Limited****NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS**[Expressed
                  in United States dollars except where
                  otherwise noted]January 31, 2007 and
                2006





**21.
      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.





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.




F-24
 
  **Polydex Pharmaceuticals
                Limited****NOTES
                  TO CONSOLIDATED FINANCIAL
                  STATEMENTS**[Expressed
                  in United States dollars except where
                  otherwise noted]January 31, 2007 and
                2006




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 Company is currently evaluating the impact of SFAS No.
      159 on its financial statements.





**22.
      COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS**





The
      comparative consolidated financial statements have been reclassified from
      statements previously presented to conform to the presentation of the 2007
      consolidated financial statements.




F-25


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




On
      May
      27, 2005, the Company acted to dismiss Ernst & Young LLP Chartered
      Accountants as its independent registered accounting firm. This determination
      followed the Company’s decision to seek proposals from independent registered
      accounting firms to audit its financial statements, and was approved by the
      Company’s Board of Directors upon the recommendation of its Audit Committee. The
      decision to terminate the Company’s relationship with Ernst & Young LLP
      Chartered Accountants did not involve a dispute with the Company over accounting
      policies or practices. During the two fiscal years ended January 31, 2005 and
      during the interim period from that date to May 27, 2005, there were no
      disagreements with Ernst & Young LLP Chartered Accountants on any matter of
      accounting principles or practices, financial statement disclosure or auditing
      scope or procedure, which disagreements if not resolved to the satisfaction
      of
      Ernst & Young LLP Chartered Accountants, would have caused Ernst & Young
      LLP Chartered Accountants to make reference to the subject matter of the
      disagreements in connection with its report. No reportable events described
      under Item 304(a)(1)(v) of Regulation S-K occurred within the two fiscal years
      ended January 31, 2005 and during the period from that date to May 27,
      2005.





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





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





During
      the interim period from May 27, 2005 to January 11, 2006, there were no
      disagreements on any matter of accounting principles or practices, financial
      statement disclosure or auditing scope or procedure, which disagreements if
      not
      resolved to the satisfaction of the Company’s independent registered accounting
      firm, would have caused the Company’s independent registered accounting firm to
      make reference to the subject matter of the disagreements in connection with
      its
      report. No reportable events described under Item 304(a)(1)(v) of Regulation
      S-K
      occurred within the period from May 27, 2005 to January 11, 2006.





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




29


ITEM
              9A.
            CONTROLS
                AND PROCEDURES




The
      Company completed an evaluation as of the end of the period covered by this
      report under the supervision and with the participation of management, including
      its Chief Executive Officer and Chief Financial Officer, of the effectiveness
      of
      the design and operation of its disclosure controls and procedures pursuant
      to
      Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”). Based
      upon that evaluation, the Chief Executive Officer and Chief Financial Officer
      concluded that the Company’s disclosure controls and procedures are effective in
      assuring that information required to be disclosed in the Company’s Exchange Act
      reports is (1) recorded, processed, summarized and reported within the time
      periods specified in the SEC’s rules and forms, and (2) accumulated and
      communicated to management, including the Company’s Chief Executive Officer and
      Chief Financial Officer, as appropriate, to allow timely decisions regarding
      disclosure. .




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




ITEM
              9B.
            OTHER
                INFORMATION




Not
      applicable.




30


**PART
      III**




ITEM
              10.
            DIRECTORS
                AND EXECUTIVE OFFICERS OF THE
                REGISTRANT




The
      information required under this item is incorporated herein by reference from
      the material contained under the captions “Board of Directors,” “Executive
      Officers” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the
      Company’s definitive proxy statement to be filed with the Securities and
      Exchange Commission in connection with its 2007 Annual Meeting of
      Members.




**Code
      of Ethics**




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




ITEM
              11.
            EXECUTIVE
                COMPENSATION




The
      information required under this item is incorporated herein by reference from
      the material contained under the captions “Board of Directors,” “Board Meetings
      and Compensation,” and “Compensation of Executive Officers,” in the Company’s
      definitive proxy statement to be filed with the Securities and Exchange
      Commission in connection with its 2007 Annual Meeting of Members.




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




The
      information required under this item is incorporated herein by reference from
      the material contained under the captions “Ownership of Voting Securities” and
“Equity Compensation Plan Information” in the Company’s definitive proxy
      statement to be filed with the Securities and Exchange Commission in connection
      with its 2007 Annual Meeting of Members.




ITEM
              13.
            CERTAIN
                RELATIONSHIPS AND RELATED
                TRANSACTIONS




The
      information required under this item is incorporated herein by reference from
      the material contained under the captions “Compensation of Executive Officers,”
“Compensation Committee Interlocks and Insider Participation” and “Transactions
      With the Company” in the Company’s definitive proxy statement to be filed with
      the Securities and Exchange Commission in connection with its 2007 Annual
      Meeting of Members.




ITEM
              14.
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES




The
      information required under this item is incorporated herein by reference from
      the material contained under the captions “Audit Fees,” “Audit-Related Fees,”
“Tax Fees,” and All Other Fees” in the Company’s definitive proxy statement to
      be filed with the Securities and Exchange Commission in connection with its
      2007
      Annual Meeting of Members.




31


**PART
      IV**




ITEM
              15.
            EXHIBITS
                AND FINANCIAL STATEMENT
                SCHEDULES




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




(1)
            Financial
                Statements of Polydex
                Pharmaceuticals





Report
      of
      Independent Auditors — Schwartz Levitsky Feldman LLP


Report
      of
      Independent Auditors — Ernst & Young LLP Chartered Accountants


Consolidated
      Balance Sheets


Consolidated
      Statements of Shareholders’ Equity


Consolidated
      Statements of Operations


Consolidated
      Statements of Cash Flows


Notes
      to
      Consolidated Financial Statements




(2)
            Financial
                Statement Schedules




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




(3)
            Exhibits




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




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




10.1
            Employment
                Agreement between Polydex Pharmaceuticals Limited and George G. Usher
                dated December 22, 1993 (filed as Exhibit 10.2 to the Annual Report
                on
                Form 10-K filed April 30, 1997, and incorporated herein by
                reference)*




10.2
            Amendment
                to Employment Agreement between Polydex Pharmaceuticals Limited and
                George
                G. Usher dated February 1, 1999 (filed as Exhibit 10.4 to the Annual
                Report on Form 10-K filed April 29, 1999, and incorporated herein
                by
                reference)*




10.3
            Research
                Agreement among Dextran Products Limited, Canadian Microbiology
                Consortium, British Columbia’s Children’s Hospital and the University of
                British Columbia, dated April 1, 1996 (filed as Exhibit 10.4 to the
                Annual
                Report on Form 10-K filed April 30, 1997, and incorporated herein
                by
                reference)




10.4
            Joint
                Venture Agreement among Chemdex, Inc., Veterinary Laboratories Inc.
                and
                Sparhawk Laboratories, Inc., dated December 1, 1992 (filed as Exhibit
                10.5
                to the Annual Report on Form 10-K filed April 30, 1997, and incorporated
                herein by reference)




10.5
            Asset
                Purchase Agreement dated as of January 13, 2004, by and among Sparhawk
                Laboratories, Inc., Polydex Pharmaceuticals Limited, Chemdex, Inc.
                and
                Veterinary Laboratories, Inc. (filed as Exhibit 10.9 to the Annual
                Report
                on Form 10-K filed April 30, 2004, and incorporated herein by
                reference)




32




10.6
            Supply
                Agreement, dated as of March 1, 2004, by and between Chemdex, Inc.
                and
                Sparhawk Laboratories, Inc. (filed as Exhibit 10.10 to the Annual
                Report
                on Form 10-K filed April 30, 2004, and incorporated herein by
                reference)




10.7
            Unsecured
                Subordinated Promissory Note dated March 4, 2004 made by Sparhawk
                Laboratories, Inc. in favor of Chemdex, Inc. (filed as Exhibit 10.11
                to
                the Annual Report on Form 10-K filed April 30, 2004, and incorporated
                herein by reference)




10.8
            Warrant
                and Repurchase Agreement, dated March 4, 2004 issued by Sparhawk
                Laboratories, Inc. to Chemdex, Inc. (filed as Exhibit 10.12 to the
                Annual
                Report on Form 10-K filed April 30, 2004, and incorporated herein
                by
                reference)




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





31.1
            Certification
                of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley
                Act
                of 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





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





33


SIGNATURES




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





POLYDEX
                PHARMACEUTICALS LIMITEDDate:
                April 30, 2007
            By:/s/
                George G. UsherGeorge
                G. Usher, President andChief
                Executive Officer





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





Date:****April
                30, 2007
            /s/
                George G. UsherGeorge
                G. Usher, Director, Presidentand
                Chief Executive Officer(Principal
                Executive Officer)Date:
                April 30, 2007
            /s/
                John A. LuceChief
                Financial Officer(Principal
                Financial and AccountingOfficer)Date:
                April 30, 2007
            /s/
                Joseph BuchmanJoseph
                Buchman, DirectorDate:
                April 30, 2007
            /s/
                Derek John Michael LedererDerek
                John Michael Lederer, DirectorDate:
                April 30, 2007
            /s/
                John L.E. SeidlerJohn
                L.E. Seidler, Director




34


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




35