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SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549


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FORM 10-K

|  |                                                                                       
|- | --------------------------------------------------------------------------------------
|x | ANNUAL REPORT PURSUANT TO SECTION
  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended January 31,
2005

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. Employer   
|Incorporation or Organization)              |  | Identification No.)
|                                            |  |                    
|421 Comstock Road, Toronto, Ontario, Canada |  | M1L 2H5            
|(Address of Principal Executive
  Offices)  |  | (Zip Code)         

Registrants
telephone number, including area code  (416)
755-2231

Securities
registered pursuant to Section 12(b) of the Act:

|                                |  |                                          
|------------------------------- |  | -----------------------------------------
|Title of Each Class             |  | Name of Each Exchange on Which Registered
|                                |  |                                          
|Common Shares, $.0167 par value |  | Boston Stock Exchange                    

Securities
registered pursuant to Section 12(g) of the Act:

Common Shares, $.0167 par value(Title of Class)

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.    Yes o  No x

Indicate
by check mark whether the Registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2).    Yes o  No x

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The
aggregate market value of the Registrants voting common shares held by
non-affiliates of the Registrant, based upon the $6.98 per share closing price
of the Registrants common shares on July 30, 2004 (the last business day of
the Registrants most recently completed second fiscal quarter), was
approximately $16,331,106 (for this purpose, the Registrant has assumed that
directors, executive officers and holders of more than 10% of the Companys
common stock are affiliates).

The
number of common shares of the Registrant outstanding as of April 28, 2005 was
3,042,296.

Portions
of the Registrants Notice of Annual Meeting and Proxy Statement for the
Registrants Annual Meeting of Members, scheduled to be held on July 8, 2005,
are incorporated by reference into Part III of this Report.

---

Cautionary Note Regarding Forward-Looking
Statements

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

---

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 address of its
statutory office in the Bahamas is c/o Higgs & Johnson, 83 Shirley
Street, Nassau, Bahamas, telephone (242) 322-8571.

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

During
approximately one month of the Companys fiscal year ended January 31, 2005
(the 2005 fiscal year), the Company also engaged in the finished product
veterinary pharmaceutical business through its subsidiary Chemdex, Inc.,
incorporated in Kansas in 1987, which, in turn, conducted its operations
through its subsidiary, Veterinary Laboratories, Inc. (Vet Labs).  On December 1, 1992, Vet Labs and Sparhawk
Laboratories Inc. (Sparhawk) entered into a Joint Venture for the purpose of
manufacturing and selling veterinary pharmaceutical products.  On March 4, 2004, the Company sold its
finished product veterinary pharmaceutical business to Sparhawk.  The sale included substantially all of the
assets of Vet Labs and its ownership interest in the Joint Venture.

Products and Sales

Iron
Dextran

Iron
Dextran is a derivative of Dextran produced by complexing iron with
Dextran.  Iron Dextran is injected into most pigs at birth as a treatment
for anemia.  The Company sells Iron Dextran to independent distributors
and wholesalers primarily in Europe, the United States and Canada, with less
significant sales in Pacific Rim countries.  Dextran Products has
regulatory approval to sell Iron Dextran from Canadian authorities, while Chemdex
has United States FDA approval for the manufacture and sale of Iron Dextran for
veterinary use.  On March 4, 2004,
Sparhawk and Chemdex entered into an exclusive Supply Agreement under which
Sparkawk 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 Australia, France, the
Netherlands, New Zealand and the United States, where it is used in limited
quantities in the manufacture of film, as well as analytical chemical
applications.  This usage requires no regulatory approval.

Veterinary Products

During
approximately one month of the 2005 fiscal year, the Company manufactured
sterile injectable products, tablets and boluses, internal and external
solutions, ointments and powders through its Vet Labs subsidiary

---

and the Joint
Venture, and Vet Labs also performed contract filling for other industry
companies.  On March 4, 2004, the
Company sold its finished product veterinary pharmaceutical business to
Sparhawk.  The sale included
substantially all of the assets of Vet Labs and its ownership interest in the
Joint Venture.

Patents, Trademarks and Licenses

Cellulose Sulphate

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

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

Cystic Fibrosis

The
Company is a party to a Research Agreement with the University of British
Columbia, a number of Canadian hospitals and a company owned by an
affiliate.  Under the terms of this Research Agreement, the Company agreed
to provide equipment and funding for continuing research on 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
a certain cystic fibrosis treatment product, a 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.

Iron
Dextran

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

Dextran
Sulphate

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

Elastin and
Collagen

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

---

Suppliers

Dextran
Products

In
the manufacture of Dextran and Dextran derivative products, the Company uses a
single supplier for its sugar raw material requirements.  The Company also
uses a single supplier 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 2005 and no shortages are anticipated in the near term.  However, any
curtailment in availability of such raw material could be accompanied by
production or other delays as well as increased raw material costs, with
consequent adverse effect on the Companys results of operations.  The
Company has no long-term contracts with any of its suppliers.

Backlog and Seasonality

The
Companys backlog as at January 31, 2005 was approximately $350,000, whereas
backlog as at January 31, 2004 was approximately $750,000.  All of these
orders are expected to be filled within the current fiscal year.  The
Companys bulk pharmaceutical intermediate business may be characterized as
seasonal in that many end-users of the finished product veterinary
pharmaceuticals manufactured from these intermediates require fewer vitamins
and other supplements during the summer months when livestock are put out to
pasture.  However, the Company does not believe that such seasonality is
material to its financial results as a whole.

Competition

The
Company is the only Canadian manufacturer of Iron Dextran and, as a result of
its ownership of Chemdex during fiscal year 2005, the Company was also the only
manufacturer of 10% bulk Iron Dextran solution in the United States.  The
only other major supplier of Iron Dextran is located in Denmark, although there
exist several smaller European sources of Iron Dextran.  Dextran Sulphate
is manufactured by several manufacturers in the U.S. 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.

On
March 4, 2004, the Company sold its finished product veterinary pharmaceutical
business to Sparhawk.  The sale included substantially all of the assets
of Vet Labs and its ownership interest in the Joint Venture.  In connection with the sale, Sparhawk and
Chemdex entered into an exclusive Supply Agreement under which Sparkawk 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.

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, 2005, the Company employed 26 employees, of whom 16 were
engaged in production, 6 in quality control, 1 in research and development, 2
in administration and 1 in marketing and sales activities.  None of the
Companys employees are covered by collective bargaining agreements. 
Management considers its relations with employees to be good.

---

Research and Development

During
the fiscal years ended January 31, 2005 and 2004, the Company expended $127,847
and $73,635, respectively, on research and development, primarily relating to
the development of Cellulose Sulphate.  Increases in research and
development expenditures are a result of additional product development
activities performed by the Company and funded outside of its partnership
relationships.  During the fiscal years ended January 31, 2005 and 2004,
the Company recognized investment tax credit benefits of $13,105 and $12,684,
respectively.

Cellulose
Sulphate (Ushercell)

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

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

During
fiscal year 2005 phase I/II clinical trials were conducted.  Highlights of selected completed clinical
studies outlined in CONRADs Development Plan are as follows:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A clinical
  study of sexually active women conducted in collaboration with Family Health
  International in Cameroon, has been completed.  The final report
  concluded that 3.5 ml 6% Cellulose Sulphate gel was as safe and acceptable to
  users as a placebo compound, and remained acceptable when used four times per
  day for 14 consecutive days.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | A study in
  collaboration with the World Health Organization of 180 healthy women in
  Uganda, Nigeria and India has been completed.  The final report
  concluded that twice daily vaginal applications of 6% Cellulose Sulphate
  appeared to be as safe and well tolerated as the placebo compound also used
  in the study.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | A study
  conducted by the HIV Prevention Trials Network to establish the safety and
  tolerance of the product among HIV-infected women, as a precursor to clinical
  trials designed to assess HIV prevention. One objective of this trial was to
  study changes in vaginal flora associated with repeated microbicide use. The
  study was completed in fiscal year 2004, and the report was presented at the
  12thConference on Retroviruses and Opportunistic Infections in
  Boston in February of 2005, indicating that Cellulose Sulphate was not
  disruptive to the vaginal PH and also resulted in clearance of Bacterial
  Vaginosis (BV) in patients who had BV at the time of enrollment in this
  study, concluding with recommendations that further study of the impact of
  Cellulose Sulphate on BV is warranted.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | A Phase I
  study in collaboration with Family Health International involving 60 healthy
  women in the United States to assess the safety and acceptability among
  sexually active and abstinent women of Cellulose Sulphate used
  intra-vaginally twice daily for 14 consecutive days has been completed. The
  final report indicates a continued safety and acceptability profile.                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Large-scale
  Phase II human clinical trials of the contraceptive efficacy of Ushercell in
  the United States began in January and February 2004 in collaboration with
  the California Family Health Council. One of the two trials was suspended due
  to lack of enrollment in a study that sought couples desiring pregnancy, but                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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| |   |                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | willing to
  postpone conception. The clinical portion of the remaining study involving
  couples that do not desire a pregnancy is expected to be completed this
  summer and a report on findings is expected in 2006.                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                     
| |   | Additionally,
  the following clinical studies have been commenced or are being actively
  planned:                                                                                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                     
| |  | A tolerance
  study of 42 HIV-infected men in collaboration with theInstitute of Tropical
  Medicine in Belgium has been planned.                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                     
| |  | A further
  study planned in collaboration with the University of California to be
  conducted with 180 sexually active women in Zimbabwe to assess the safety and
  acceptability of Ushercell in use with a diaphragm has been planned.                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                     
| |  | A study to
  determine the effectiveness of Cellulose Sulphate gel as a treatment for
  Bacterial Vaginosis, a common disorder among reproductive-age women, has been
  planned, funded and clinical trial supplies have been shipped to Brazil.  The trial is expected to commence in April
  2005, with a report on findings expected in mid-2006.
| |   |                                                                                                                                                                                                                                                                                                                                                     
| |  | A further
  large-scale Phase III clinical trial is planned to assess the effect of
  Ushercell on vaginal HIV acquisition.  This study design will enroll
  more than 2,000 sexually active women with a high risk of HIV
  infection.  A projected start timeline has been scheduled for June 2005.                                               

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

Cystic
Fibrosis

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

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

Segmented Information

The
information regarding the geographic distribution of revenue, operating results
and assets set forth in Note 17 to
the Companys Consolidated Financial Statements for the fiscal year ended
January 31, 2005 under Item 8 Financial Statements and Supplementary Data.

---

|        |           
|------- | ----------
|ITEM 2. | PROPERTIES

The
Companys wholly-owned subsidiary, Polydex Chemicals (Canada) 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 8,000 liters of Iron Dextran per week and
approximately 250 kilos of Dextran Sulphate per quarter.

Management
believes that the Companys facility is adequate for its present
requirements.  The facility has the
capacity for a limited expansion of production of existing and new
products.  The Company considers its
current equipment to be in good condition and suitable for the operations
involved.

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

|        |                    
|------- | -------------------
|ITEM 3. | LEGAL
  PROCEEDINGS

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

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

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

No
matters were submitted to a vote of security holders, through the solicitation
of proxies or otherwise, during the Companys fourth quarter ended January 31,
2005.

---

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 SmallCap
Market.  The Companys common shares
trade under the symbol POLXF.  The
Companys common shares also trade on the Boston Stock Exchange under the
symbol PXL.

The
reported high and low closing prices of the Companys common shares as reported
on the NASDAQ SmallCap Market for each full quarterly period within the two
most recent fiscal years of the Company were as follows (similar prices were
quoted on the Boston Stock Exchange):

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

|                      |  |      |      |     |  |      | 
|--------------------- |  | ---- | ---- | --- |  | ---- | 
|Fiscal Year 2004      |  |      |      |     |  |      | 
|fiscal quarter ended: |  | High |      | Low | 
|                      |  |      |      |     | 
|April 30,
  2003      |  | $    | 2.67 |     |  | 2.03 | 
|July 31,
  2003       |  |      | 4.85 |     |  | 2.26 | 
|October 31,
  2003    |  |      | 6.00 |     |  | 3.20 | 
|January 31,
  2004    |  |      | 8.62 |     |  | 5.01 | 

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

As
of April 28, 2005 there were approximately 361 holders of record of the
Companys common shares.

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

There
are no governmental laws, decrees or regulations in the Commonwealth of the
Bahamas applicable to the Company that restrict the export or import of
capital, including foreign exchange controls, or that affect the remittance of
dividends or other payments to nonresident holders of the Companys common
shares.  Furthermore, U.S. holders of
the Companys common shares are not subject to taxes under Bahamian law.

The
Company did not sell any unregistered common shares during its 2005 fiscal year
and does not currently have a plan to repurchase any of its common shares.

---

|        |                          
|------- | -------------------------
|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, |           
|                                               |  |                                 |           
|                                               |  | 2005                            |            | 2004 |  | 2003       |   | 2002 |            | 2001 | 
|                                               |  |                                 |            |      |  |            |   |      |            |      | 
|Sales from continuing operations               |  |                                 | 6,372,359  |      |  | 14,092,189 |   |      | 12,786,343 |      |  | 12,167,530 |   |  | 13,646,158 | 
|Net income (loss) from continuing
  operations |  |                                 | 1,139,911  |      |  | (5,999     | ) |      | (673,741   | )    |  | (206,880   | ) |  | 131,284    | 
|Net income (loss) per common share             |  |                                 | 0.38       |      |  |           |   |      | (0.22      | )    |  | (0.07      | ) |  | 0.04       | 
|Total assets                                   |  |                                 | 10,811,873 |      |  | 10,510,513 |   |      | 9,712,574  |      |  | 10,080,880 |   |  | 11,217,326 | 
|Long-term borrowings                           |  |                                 | 833,631    |      |  | 1,013,701  |   |      | 1,188,603  |      |  | 1,724,159  |   |  | 2,031,660  | 

---

|        |                                                                                        
|------- | ---------------------------------------------------------------------------------------
|ITEM 7. | MANAGEMENTS
  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The
Companys fiscal year ends on January 31stof each year.  In this report, fiscal year 2005 refers to
the Companys fiscal year ended January 31, 2005.  The following
discussion should be read in conjunction with the financial statements and notes
thereto included elsewhere in this report. 
The Companys financial statements are prepared in accordance with
United States generally accepted accounting principles.  All amounts are in United States dollars,
unless otherwise denoted.  This
discussion contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended.  For a discussion of risks, uncertainties and
other factors that could cause actual results to differ materially from those
expressed in, or implied by the forward-looking statements, see the discussion
of Risk Factors below and Cautionary Note Regarding Forward-Looking
Statements above.

Overview

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

Dextran
Products Business

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

In
fiscal year 2006 management intends to continue its focus on the core
businesses of Dextran Products that have historically been the backbone of the
Company.  Opportunities to increase distribution chains for existing
Dextran products in certain overseas markets, such as India, China and Russia
are being explored by management.  Expanding current market opportunities
and the potential for new market penetration has led management to make plant
refurbishments and the expansion of production capacity a priority for fiscal
year 2006 with respect to Dextran Products operations.

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

Chemdex, Vet Labs and the Joint Venture Business

During
approximately one month of the 2005 fiscal year, the Company also engaged in
the finished product veterinary pharmaceutical business through its United
States subsidiary Chemdex, which, in turn, conducted its operations through its
subsidiary, Vet Labs.  On December 1, 1992, Vet Labs and Sparhawk
Laboratories Inc. entered into a Joint Venture for the purpose of manufacturing
and selling veterinary pharmaceutical products.   On January 13,
2004, the Company, Chemdex and Vet Labs entered into an Asset Purchase
Agreement with Sparhawk pursuant to which the Company agreed to sell its
finished product veterinary pharmaceutical business, including substantially
all of the assets of Vet Labs and its ownership interest in the Joint Venture,
to Sparhawk for $5,500,000 in cash.  The sale was completed on March 4,
2004.  Simultaneously with the closing, Chemdex advanced $350,000 to
Sparhawk in exchange for an unsecured subordinated promissory note bearing
interest at 13% per annum and a warrant to purchase 4% of the equity of
Sparhawk.  The promissory note is payable in full on March 4, 2009. 
Interest is payable annually, but can be deferred and added to the principal
balance of the promissory note each year

---

at Sparhawks
discretion.  The warrant becomes exercisable on March 5, 2009 and expires
at the earlier of payment in full of the promissory note or March 4,
2014.  Chemdex also entered into a supply agreement with Sparhawk to
supply ferric hydroxide and hydrogenated dextran solution to Sparhawk on an
exclusive basis in the United States for 10 years.  In connection with the
sale, the litigation involving the Joint Venture, Sparhawk Laboratories, Inc. v.
Veterinary Laboratories, Inc., et al, Case No. 02CV07426, County of
Johnson, State of Kansas, was settled, and a Motion of Approval of Settlement
and Stipulation of Dismissal with Prejudice was filed with the Court on March
4, 2004.

Management
considered the finished goods veterinary pharmaceuticals industry to be a
highly competitive, mature industry, and believed that meaningful growth in
this industry would require significant investment in new product
development.  The Companys investment in this industry through the Joint
Venture required the sharing of profits with its partner.  Management
believed that the Company could expect to obtain a higher return on investment
by focusing on its current Dextran Products business and on human
pharmaceutical research and development projects.  The sale of this business segment resulted in a significant reduction
in consolidated sales and gross profits during fiscal year 2005.

Results of Operations

| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | Fiscal Year ended
  January 31, 2005 compared to Fiscal Year ended January 31, 2004 compared to
  Fiscal Year ended January 31, 2003

|                            |  |         |           |         |   |         |   |   |          |  
|--------------------------- |  | ------- | --------- | ------- | - | ------- | - | - | -------- | -
|                            |  | FY 2005 |           | FY 2004 |   | FY 2003 |  
|                            |  |         |           |         |   |         |  
|Net income (loss)           |  | $       | 1,139,911 |         | $ | (5,999  | ) | $ | (673,741 | )
|                           
|Earnings
  (loss) per share |  |         | 0.38      |         |   | 0.00    |   |   | (0.22    | )

The
fiscal year 2005 increase in net income is attributable to the gain on sale of
the Vet Labs assets.  This gain is
partially offset by an increased tax provision.  The fiscal year 2004 reduction in net loss is attributable to the
recovery of income tax expense.  In fiscal year 2004, there was a recovery
of income taxes of $389,968 as compared to a provision for income taxes of
$751,366 in fiscal year 2003, due to the recognition of the tax benefit of the
non-operating losses at Chemdex, as described below.  The provision for
income taxes in fiscal year 2003 significantly exceeded income before income
taxes because of the losses incurred at the Company level in the Bahamas, for
which no tax recovery is available, and because a full valuation allowance was
taken against the deferred tax assets relating to non-operating losses at
Chemdex.

|                                    |         |   |           |  |         |          |         |                           |          |   |      
|----------------------------------- | ------- | - | --------- |  | ------- | -------- | ------- | ------------------------- | -------- | - | -----
|Income (loss) before
  income taxes |         |   |           |  |         |          |         | Fiscal
  Years            |         
|                                    |         |   |           |  |         |          |         |                          
|                                    | FY 2005 |   | FY 2004   |  | FY 2003 |          | 05 v 04 |                           | 04 v 03  |  
|                                    |         |   |           |  |         |          |         |                           |          |   |      
|                                    |         |   |           |  |         |          |         | (%
  increase (decrease)) |         
|Consolidated                        |         | $ | 1,706,777 |  | $       | (395,967 | )       | $                         | 77,625   |   | 5,310
|Dextran
  Products                  |         |   | 256,169   |  |         | 58,703   |         |                           | 872,291  |   | 336  
|Chemdex                             |         |   | 2,093,478 |  |         | (63,029  | )       |                           | (247,682 | ) | 3,421
|                                    |         |   |           |  |         |          |         |                           |          |   |      

The
fiscal year 2005 improvement in operating results is primarily attributable to
the gain on sale of the Vet Labs assets at Chemdex and the reduction in the
foreign exchange loss at Dextran Products. 
The fiscal year 2004 decline in operating results is primarily
attributable to the large foreign exchange loss and gross margin decline at
Dextran Products due to the decline in the United States dollar relative to the
Canadian dollar.  The United States dollar continued to decline in value
relative to the Canadian dollar during fiscal year 2005, which negatively
affected gross margins at Dextran Products, since the majority of its revenue
is denominated in United States dollars while the majority of its cost of sales
is denominated in Canadian dollars. 
Therefore, if the value of the Canadian dollar increases in relation to
the United States dollar, margins decrease.  Exchange rate fluctuations
resulted in a 4% decrease in margins at Dextran Products in fiscal year
2005.  Dextran Products realized a foreign exchange gain in fiscal year
2005 because it has a net liability exposure to the United States dollar.  During fiscal year 2004, Dextran Products
had a significant net asset exposure to the United States dollar because the
majority of its accounts

---

receivable
balance and intercompany receivables were denominated in United States dollars,
while the majority of its liabilities and expenses are in Canadian
dollars.  During March 2004, Chemdex repaid its intercompany debt to
Dextran Products and advanced additional funds to Dextran Products.

Dextran
Products.  The fiscal year 2005 increase in
income before income taxes is primarily a result of the foreign exchange gain
described above.  In addition, there is
an increase in investment income because of the purchase of marketable
securities.  These increases were
partially offset by a decrease in gross margin and increased selling, general
and administrative expenses.  The fiscal
year 2004 decrease in income before income taxes is a result of the rise in the
value of the Canadian dollar, which resulted in the decrease in profit margins
described above, as well as an increase in selling, general and administrative
expenses, which are stated in United States dollars, and a foreign exchange
loss.

Chemdex.
 The fiscal year 2005 increase in income before income taxes is due to the
gain on the sale of the Vet Labs assets. 
Since March 4, 2004, the only operations for Chemdex have been the
supply of raw materials to Sparhawk. 
The fiscal year 2004 decrease in loss before income taxes is a result of
the increase in sales and profit margins.

|                              |  |         |           |         |   |            |   |                           |            |         | Fiscal Years |   
|----------------------------- |  | ------- | --------- | ------- | - | ---------- | - | ------------------------- | ---------- | ------- | ------------ | --
|                              |  |         |           |         |   |            |   |                           |            |         |              |   
|Sales                         |  | FY 2005 |           | FY 2004 |   | FY 2003    |   | 05 v 04                   |            | 04 v 03 |             
|                              |  |         |           |         |   |            |   |                           |            |         |             
|                              |  |         |           |         |   |            |   | (%
  increase (decrease)) |           
|Consolidated                  |  | $       | 6,372,359 |         | $ | 14,092,189 |   | $                         | 12,786,343 |         | (55          | )%
|Dextran
  Products            |  |         | 4,916,213 |         |   | 4,742,519  |   |                           | 4,575,359  |         | 4            | % 
|Percentage
  of Company sales |  |         | 77        | %       |   | 34         | % |                           | 36         | %       |              |   
|Chemdex                       |  |         | 1,456,146 |         | $ | 9,349,670  |   | $                         | 8,210,984  |         | (84          | )%
|Percentage
  of Company sales |  |         | 23        | %       |   | 66         | % |                           | 64         | %       |              |   

The
significant decrease in sales during fiscal year 2005 is due to the sale of the
Vet Labs business on March 4, 2004. 
This business represented virtually all of the Chemdex operating
segment.  The majority of the fiscal
year 2004 sales increase was attributable to the Chemdex operating segment.

Dextran
Products.  Demand for Dextran and related
products increased in both fiscal year 2005 and fiscal year 2004 due primarily
to favorable pricing.  Since Dextran Products pricing of product is
primarily denominated in United States dollars, the decline in value of the
United States dollar relative to the Euro resulted in lower pricing for
European agents, increasing demand for the products of Dextran
Products.   Management expects
sales levels to increase slightly in fiscal year 2006 due to increased sales in
Europe, absent a significant rise in the value of the United States dollar.

Chemdex. 
As described above, the finished goods veterinary pharmaceutical business was
sold on March 4, 2004 resulting in the significant decline in sales for this
operating segment.  Under a supply
agreement with Sparhawk, Chemdex continues to supply raw materials for the
manufacture of bulk iron dextran by Sparhawk. 
The introduction of three new products in the finished goods veterinary
pharmaceutical business accounted for $938,307 of the fiscal year 2004 sales
increase.

|                      |  |         |           |         |   |           |   |                           |           |         |                |   
|--------------------- |  | ------- | --------- | ------- | - | --------- | - | ------------------------- | --------- | ------- | -------------- | --
|                      |  |         |           |         |   |           |   |                           |           |         | Fiscal
  Years |   
|                      |  |         |           |         |   |           |   |                           |           |         |                |   
|Gross profit          |  | FY 2005 |           | FY 2004 |   | FY 2003   |   | 05 v 04                   |           | 04 v 03 |               
|                      |  |         |           |         |   |           |   |                           |           |         |                |   
|                      |  |         |           |         |   |           |   | (%
  increase (decrease)) |          
|Consolidated          |  | $       | 1,984,630 |         | $ | 3,349,496 |   | $                         | 3,257,384 |         | (41            | )%
|Percentage
  of sales |  |         | 31        | %       |   | 24        | % |                           | 25        | %       |                |   
|Dextran
  Products    |  | $       | 1,504,616 |         | $ | 1,539,164 |   | $                         | 1,889,001 |         | (2             | )%
|Percentage
  of sales |  |         | 31        | %       |   | 32        | % |                           | 41        | %       |                |   
|Chemdex               |  | $       | 288,332   |         | $ | 1,739,558 |   | $                         | 1,281,409 |         | (83            | )%
|Percentage
  of sales |  |         | 20        | %       |   | 19        | % |                           | 16        | %       |                |   

The
fiscal year 2005 decrease in gross profit resulted from the decrease in sales
from the Chemdex operating segment due to the sale of the finished goods
veterinary pharmaceutical business.  The
increase in gross profit percentage is a result of the finished goods
veterinary pharmaceutical business being a lower margin business

---

than the Dextran Products operating segment.  The
fiscal year 2004 increase in gross profit resulted from increased sales at the
Chemdex operating segment.  The concurrent decline in gross profit
percentage is primarily due to declines at the Dextran Products operating
segment due to exchange rate fluctuations, which caused a decrease in
margins.

Dextran
Products.  Dextran Products fiscal year 2005 and
2004 gross profit decrease was due to the significant rise in the Canadian
dollar relative to the United States dollar over the two year period.  The
majority of Dextran Products costs are incurred in Canadian dollars, while the
majority of its sales are in United States dollars.  Therefore, as the
value of the Canadian dollar rises in relation to the United States dollar,
Dextran Products margins decrease.  Exchange rate fluctuations resulted
in a 4% and an 8% decrease in margins at Dextran Products in fiscal years 2005
and 2004, respectively.   Excluding
the impact of exchange rates, Dextran Products realized an increase in margins
during fiscal year 2005 due to cost control measures over materials and
increased productivity.  A modest price
increase for certain products also occurred at Dextran Products in fiscal year
2005.

Chemdex. 
In fiscal year 2005, Chemdex operations consist of approximately one month of
results from the finished goods veterinary pharmaceutical business.  The fiscal year 2004 increase in gross
profit and margin at Chemdex was primarily attributable to the increased sales
levels, particularly in the high-margin injectables product line, which
resulted in lower average fixed costs.

|                                                          |  |         |           |         |   |           |  |         |           |         |                           |    |  |    |   | 
|--------------------------------------------------------- |  | ------- | --------- | ------- | - | --------- |  | ------- | --------- | ------- | ------------------------- | -- |  | -- | - | 
|                                                          |  |         |           |         |   |           |  |         |           |         | Fiscal
  Years            |   
|                                                          |  |         |           |         |   |           |  |         |           |         |                           |   
|                                                          |  | FY 2005 |           | FY 2004 |   | FY 2003   |  | 05 v 04 |           | 04 v 03 |                          
|                                                          |  |         |           |         |   |           |  |         |           |         |                          
|                                                          |  |         |           |         |   |           |  |         |           |         | (%
  increase (decrease)) |   
|Selling, promotion, general and
  administrative expenses |  | $       | 1,566,746 |         | $ | 2,096,108 |  | $       | 1,799,292 |         | (25                       | )% |  | 16 | % | 

The
fiscal year 2005 decrease in selling, promotion, general and administrative
expenses is a result of the sale of the finished goods veterinary
pharmaceutical business in March, 2004. 
The Dextran Products operating segment experienced an increase in
selling, promotion, general and administrative expenses in fiscal year
2005.  These costs were incurred in
Canadian dollars, resulting in increased expenses upon translation to United
States dollars due to the significant rise in the Canadian dollar as discussed
above.

The
fiscal year 2004 increase in selling, promotion, general and administrative
expenses is a result of three main factors.  The cost of the Companys
director and officer liability insurance increased by 144% as compared to
fiscal year 2003, due to general market conditions.  The Company has not
made a claim under any director and officer liability policy.  Management
salaries at Chemdex also included a full year of salary for the general manager
who was hired in the fourth quarter of fiscal year 2003.  Finally, the
selling, promotion, general and administrative expenses incurred at Dextran
Products were incurred in Canadian dollars, resulting in increased expenses
upon translation to United States dollars due to the significant rise in the
Canadian dollar as discussed above.

|                                      |         |   |         |   |         |         |         |   |         |   |                           |   |  |     |    | 
|------------------------------------- | ------- | - | ------- | - | ------- | ------- | ------- | - | ------- | - | ------------------------- | - |  | --- | -- | 
|Research and
  development            |         |   |         |   |         |         |         |   |         |   | Fiscal
  Years            |  
|                                      |         |   |         |   |         |         |         |   |         |   |                          
|                                      | FY 2005 |   | FY 2004 |   | FY 2003 |         | 05 v 04 |   | 04 v 03 |  
|                                      |         |   |         |   |         |         |         |   |         |   |                          
|                                      |         |   |         |   |         |         |         |   |         |   | (%
  increase (decrease)) |  
|Research and development expenditures |         | $ | 127,847 |   | $       | 73,635  |         | $ | 193,284 |   | 74                        | % |  | (62 | )% | 
|Investment tax credits                |         |   | (13,105 | ) |         | (12,684 | )       |   | (21,186 | ) | 3                         | % |  | (40 | )% | 
|Net research and development expense  |         |   | 114,742 |   |         | 60,951  |         |   | 172,098 |   | 88                        | % |  | (65 | )% | 

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

---

expected to
continue at necessary levels for the foreseeable future.  The Companys research and development
expenditures are expected to increase in fiscal year 2006 due to additional
product development activities the Company expects to perform and fund outside
of its partnership relationships.

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

Due
to continued direct funding of research and development expenses by third party
public and/or private sector groups, as well as investment tax credits claimed
by Dextran Products, the Companys research and development expense decreased
in fiscal year 2004.

|                                      |  |         |         |         |   |         |  |                |         |         |                           |    |  |   |   | 
|------------------------------------- |  | ------- | ------- | ------- | - | ------- |  | -------------- | ------- | ------- | ------------------------- | -- |  | - | - | 
|                                      |  |         |         |         |   |         |  | Fiscal
  Years |        
|                                      |  |         |         |         |   |         |  |                |        
|                                      |  | FY 2005 |         | FY 2004 |   | FY 2003 |  | 04 v 03        |         | 04 v 03 |                          
|                                      |  |         |         |         |   |         |  |                |         |         |                          
|                                      |  |         |         |         |   |         |  |                |         |         | (%
  increase (decrease)) |   
|Depreciation and amortization expense |  | $       | 513,095 |         | $ | 617,685 |  | $              | 572,129 |         | (17                       | )% |  | 8 | % | 

The
fiscal year 2005 decrease in depreciation and amortization expense is
attributable to the sale of the finished goods veterinary pharmaceutical
business in March 2004.  The fiscal year
2004 increase in depreciation and amortization expense is primarily
attributable to new production equipment purchased during fiscal year 2003 at
Dextran Products and the increase in the value of the Canadian dollar relative
to the United States dollar.

|                 |  |         |        |         |   |         |  |                |         |         |                           |    |  |     |    | 
|---------------- |  | ------- | ------ | ------- | - | ------- |  | -------------- | ------- | ------- | ------------------------- | -- |  | --- | -- | 
|                 |  |         |        |         |   |         |  | Fiscal
  Years |        
|                 |  |         |        |         |   |         |  |                |        
|                 |  | FY 2005 |        | FY 2004 |   | FY 2003 |  | 05 v 04        |         | 04 v 03 |                          
|                 |  |         |        |         |   |         |  |                |         |         |                           |   
|                 |  |         |        |         |   |         |  |                |         |         | (%
  increase (decrease)) |   
|Interest expense |  | $       | 91,210 |         | $ | 133,382 |  | $              | 150,527 |         | (32                       | )% |  | (11 | )% | 

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

|                             |  |         |        |         |   |          |   |         |          |         |                           |   |  |      |    | 
|---------------------------- |  | ------- | ------ | ------- | - | -------- | - | ------- | -------- | ------- | ------------------------- | - |  | ---- | -- | 
|                             |  |         |        |         |   |          |   |         |          |         | Fiscal
  Years            |  
|                             |  |         |        |         |   |          |   |         |          |         |                           |  
|                             |  | FY 2005 |        | FY 2004 |   | FY 2003  |   | 05 v 04 |          | 04 v 03 |                          
|                             |  |         |        |         |   |          |   |         |          |         |                          
|                             |  |         |        |         |   |          |   |         |          |         | (%
  increase (decrease)) |  
|Foreign exchange gain (loss) |  | $       | 46,172 |         | $ | (447,602 | ) | $       | (113,602 | )       | 110                       | % |  | (294 | )% | 

The
increase in foreign exchange gain at Dextran Products in fiscal year 2005 was
due to the significant decline in Dextran Products net exposure to the United
States dollar.  Dextran Products has a
net liability exposure to the United States dollar because intercompany
payables denominated in United States dollars exceed its United States dollar
denominated accounts receivable balance. 
Dextran Products realized a foreign exchange gain in fiscal 2005 because
the Canadian dollar increased in value relative to the United States
dollar.  During fiscal year 2004,
Dextran Products had large intercompany receivables denominated in United
States dollars, and experienced a foreign exchange loss in fiscal year 2004
because the value of the Canadian dollar increased relative to the United
States dollar.  A large portion of these
intercompany receivables were repaid in March 2004 when the Joint Venture
operations were sold.  As compared to fiscal year 2004, management does
not expect that the Company will incur significant foreign exchange losses in
fiscal year 2006.

---

|                       |  |         |         |         |   |          |   |         |          |         |                           |   |  |    |    | 
|---------------------- |  | ------- | ------- | ------- | - | -------- | - | ------- | -------- | ------- | ------------------------- | - |  | -- | -- | 
|                       |  |         |         |         |   |          |   |         |          |         | Fiscal
  Years            |  
|                       |  |         |         |         |   |          |   |         |          |         |                           |  
|                       |  | FY 2005 |         | FY 2004 |   | FY 2003  |   | 05 v 04 |          | 04 v 03 |                          
|                       |  |         |         |         |   |          |   |         |          |         |                          
|                       |  |         |         |         |   |          |   |         |          |         | (%
  increase (decrease)) |  
|Other income (expense) |  | $       | 105,883 |         | $ | (389,735 | ) | $       | (372,111 | )       | 127                       | % |  | (5 | )% | 

In
fiscal year 2005, the Company earned interest income of $133,117 from the
investment of the proceeds from the sale of the Vet Labs assets.  In fiscal year 2004, the other expenses
relate almost entirely to legal and receiver costs associated with the
winding-up of the Joint Venture, and the resulting litigation.  In fiscal
year 2004, legal and receiver fees relating to this process totaled $397,380,
as compared to $27,834 in fiscal year 2005.  Additionally, due to the
uncertainty related to this situation, in fiscal year 2003, the Company
provided an allowance for the entire receivable balances of $132,614 due from
Sparhawk.

|                         |  |         |          |         |   |          |   |         |         |         |                           |    |  |      |    | 
|------------------------ |  | ------- | -------- | ------- | - | -------- | - | ------- | ------- | ------- | ------------------------- | -- |  | ---- | -- | 
|                         |  |         |          |         |   |          |   |         |         |         | Fiscal
  Years            |   
|                         |  |         |          |         |   |          |   |         |         |         |                           |   
|Tax provision (recovery) |  | FY 2005 |          | FY 2004 |   | FY 2003  |   | 05 v 04 |         | 04 v 03 |                          
|                         |  |         |          |         |   |          |   |         |         |         |                          
|                         |  |         |          |         |   |          |   |         |         |         | (%
  increase (decrease)) |   
|Consolidated             |  | $       | 566,866  |         | $ | (389,968 | ) | $       | 751,366 |         | 245                       | %  |  | (152 | )% | 
|Dextran
  Products       |  |         | (193,134 | )       |   | 110,032  |   |         | 430,886 |         | (276                      | )% |  | (74  | )% | 
|Chemdex                  |  |         | 637,000  |         |   | (500,000 | ) |         | 320,480 |         | 227                       | %  |  | (256 | )% | 

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

The
fiscal year 2005 tax provision at Chemdex is a result of the gain recognized on
the sale of the Vet Labs assets.  The
fiscal year 2004 Chemdex tax benefit was recorded because there was no longer
uncertainty as to the ability of Chemdex to use non-operating losses following
the sale of the Vet Labs assets for a gain subsequent to the end of fiscal year
2004.

Liquidity
and Capital Resources

As
of January 31, 2005, the Company had cash and cash equivalents of $2,401,051,
compared to cash of $59,455 at January 31, 2004.  In fiscal year 2005, the
Company used cash of $310,351 in its operating activities, compared to
generating cash from operations of $221,425 for fiscal year 2004. 
Although there was a significant increase in net income in fiscal year 2005,
this increase resulted from the gain on sale of the finished products
veterinary pharmaceutical business, which proceeds are classified as an
investing activity.   The decrease in
cash generated from operations in fiscal year 2005 as compared to cash
generated in fiscal year 2004 is because of the decrease in earnings when the
gain on sale of the finished products veterinary pharmaceutical business is
removed.  The cash generated from
operations in fiscal year 2004 was less than that generated in fiscal year
2003, even though the net loss was significantly less in fiscal year 2004,
because the reduction in the net loss resulted from the deferred tax recovery,
which was a non-cash item.  There were
significant non-cash expenses relating to deferred income taxes and the
writedown of loan to Sparhawk, in fiscal year 2003, which were not incurred in
fiscal year 2004.  Depreciation and
amortization continues to be a large non-cash expense of the Company.

The
Company maintained $3,712,803 of working capital and a current ratio of 3.8 to
1 as of January 31, 2005, compared to $2,058,161 and 1.8 to 1 as of January 31,
2004, and $1,528,856 and 1.6 to 1 as of January 31, 2003.

---

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

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

At
January 31, 2005, the Company had accounts receivable of $922,267 and inventory
of $1,516,893, compared to $1,040,732 and $2,693,312, respectively, at January
31, 2004.  The January 31, 2004 balances included amounts classified as
assets subject to sale agreement, which represented amounts for the finished
product veterinary pharmaceutical business. 
The decrease in both accounts receivable and in inventory levels is due
to the sale of the Vet Labs assets in March 2004.  At January 31, 2003,
the Company had accounts receivable of $1,351,515 and inventory of
$2,265,963.  The decrease in accounts receivable from fiscal year 2003 to
fiscal year 2004 was due to the timing of collections at year-end, while the
increase in inventory levels was due to the stocking of new products at
Chemdex.

At
January 31, 2005, the Company had accounts payable of $463,579, compared to
$1,099,736 at January 31, 2004.  The January 31, 2004 balance included
amounts classified as liabilities subject to sale agreement, which represented
amounts for the finished product veterinary pharmaceutical business.  The decrease in accounts payable levels is
due to the sale of the Vet Labs assets in March 2004.  At January 31,
2003, the Company had accounts payable of $1,205,383, with the decrease between
fiscal year 2004 and fiscal year 2003 due primarily to timing of supplier
payments.

During
fiscal year 2005, capital expenditures totaled $182,691, as compared to
$396,704 in fiscal year 2004 and $367,868 in fiscal year 2003.  The
majority of the capital expenditures were for production equipment at the
Dextran Products plant in Toronto in these fiscal years.  Management
intends to continue its plant refurbishment and expansion plan in fiscal year
2006, and expects capital expenditures to increase in that period.

During
fiscal year 2005, the Company invested a portion of the proceeds from the sale of the
finished product veterinary pharmaceutical business in medium-term, investment-grade,
debt securities denominated in Canadian dollars. These securities have maturities ranging
from December 1, 2005 to June 7, 2007. Unrealized gains and losses will occur as the market interest rate varies. Management does not
expect significant gains or losses in the future due to the relatively short term to maturity of
the debt securities. Management plans to hold these debt securities to maturity unless
such funds are needed for working capital or other cash needs.

The
change in accumulated other comprehensive income (loss) 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 U.S. dollars.

Dextran
Products has a Cdn. $1,250,000 (U.S. $1,007,000) line of credit, of which Cdn.
$30,000 (U.S. $24,000) was utilized at January 31, 2005.  At January 31,
2004, Cdn. $150,000 (U.S. $113,000) of the line of credit was utilized. 
This line of credit bears interest at the Canadian banks prime lending rate
plus 0.75% (2005  5%; 2004  5%).  This indebtedness is collateralized by
a general security agreement over the Companys assets and a collateral
mortgage of Cdn. $500,000 on the Dextran Products building in Toronto.

The
significant decrease in long-term debt from fiscal year 2004 to fiscal year
2005 is due to the full repayment of the share value guarantee on March 4,
2004.  The majority of the long-term debt is due in the next fiscal
year.  Dextran Products entered into one
new long-term debt obligation during fiscal year 2005, which related to the
buyout of a piece of office equipment.

Chemdex
entered into a long-term debt obligation on September 19, 2003, which related
to the redemption of the 10% minority interest in Chemdex.  The redemption
amount was $146,500, which is to be paid in 25 equal monthly installments of
$5,860, commencing on the redemption date.  Since this installment
contract is non-interest bearing, it has been discounted using a discount rate
of 9%.  The present value of this installment contract is $45,517, which
has been recorded as long-term debt.

The
Company entered into one new capital lease obligation at Dextran Products
during fiscal year 2005, for a piece of office equipment.  Capital lease
obligations are due over the next five years, the majority of which are due in
the next two 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 prime rate of Toronto
Dominion Bank plus 1.50% (the Loan).  The Loan was used to partially
fund a $1,000,000 payment to the State of Florida in order to allow Thomas C.
Usher to regain possession of 430,000 Common Shares of the Company then held by
the State as collateral security relating to the liquidation of insurance companies
formerly owned by Thomas C. Usher.  Repayment of the Loan is accomplished
by monthly payments and through offsets by the Company against royalty payments
due Thomas C. Usher pursuant to intellectual property license agreements and,
in the past, bonus payments, if any, granted Thomas C. Usher as an employee of
the Company.  The amount outstanding under the Loan as of January 31, 2005
was $373,373, as compared to $417,467 at January 31, 2004, including accrued
interest.  The Company has taken a cumulative provision of $264,543
against accrued interest on this loan at January 31, 2005, compared to a
cumulative provision of $242,677 at January 31, 2004.  Thomas C. Usher passed away on February 26, 2005.  Obligations with
respect to the Loan
transferred to the estate of Thomas C. Usher. 
The Company continues to be obligated to make royalty payments pursuant
to the license agreements, and intends to continue to offset such payments
against the Loan.

In
August 1999, Thomas C. Usher personally assumed all of the assets and
liabilities of Novadex Corp., including the balance of receivables (the
Receivables) due to the Company from Novadex Corp.  The Receivables have
no specific repayment terms.  The total outstanding amount of the Receivables
as of January 31, 2005 was $285,037, as compared to $366,216 at January 31,
2004.  Thomas C. Usher also owed $250,000 to a subsidiary of the Company,
Novadex International Limited, as of January 31, 2005, pursuant to a
non-interest bearing loan with no specific repayment terms.  The
outstanding amount of this loan has not changed from January 31, 2004.  The amounts continue to remain owing from
the estate of Thomas C. Usher.

Thomas
C. Usher had pledged 323,051 common shares of the Company as security for these
amounts owing to the Company.  These common shares had a market value of
$2,216,100 at January 31, 2005, based on the closing price of the Companys
common shares on the NASDAQ SmallCap market on January 31, 2005.  The Company intends to continue to hold the
pledged assets as collateral until the amounts owing discussed above are
repaid.

The
Company has a commitment to pay an amount equal to one years salary, $110,000,
to Thomas C. Ushers estate within one year of his death.

The
Company also has an outstanding loan payable to Ruth Usher, a member of the
Board of Directors through her retirement on October 31, 2003, the beneficial
owner of greater than 5% of the outstanding common shares of the Company, a
former director, and the widow of Thomas C. Usher.  The amount due from
the Company pursuant to this loan decreased to $681,304 at January 31, 2005
from $683,234 at January 31, 2005 due to interest charges less monthly payments
by the Company.  Commencing in March
2005, the Company is required to make blended monthly payments of $5,000.  The Company made a blended payment of $3,500
in February 2005.

Off-Balance Sheet
Arrangements

The
Company has no off-balance sheet arrangements.

Tabular Disclosure of
Contractual Obligations

As
of January 31, 2005, future minimum cash payments due under contractual
obligations, including, among others, the Dextran Products line of credit, the
loan payable to Ruth Usher, the long-term debt obligation in connection with
the Chemdex redemption, and capital lease agreements, are as follows:

---

|                                  |  |                         |           |                    |   |             |  |           |         |                     |   |         |  |   |         | 
|--------------------------------- |  | ----------------------- | --------- | ------------------ | - | ----------- |  | --------- | ------- | ------------------- | - | ------- |  | - | ------- | 
|                                  |  | Payment
  due by period |          
|                                  |  |                         |          
|Contractual Obligations           |  | Total                   |           | Less than
  1 year |   | 1-3
  years |  | 3-5 years |         | More than
  5 years |  
|                                  |  |                         |           |                    |   |             |  |           |         |                     |  
|Long-term
  debt obligations (1)  |  | $                       | 734,942   |                    | $ | 108,232     |  | $         | 122,703 |                     | $ | 122,703 |  | $ | 381,304 | 
|Capital
  lease obligations (2)   |  |                         | 350,391   |                    |   | 180,300     |  |           | 158,472 |                     |   | 11,619  |  |   |        | 
|Operating
  lease obligations (3) |  |                         | 780       |                    |   | 520         |  |           | 260     |                     |   |        |  |   |        | 
|Purchase
  obligations            |  |                         | 64,668    |                    |   | 64,668      |  |           |        |                     |   |        |  |   |        | 
|Revolving
  loans (4)             |  |                         | 24,170    |                    |   | 24,170      |  |           |        |                     |   |        |  |   |        | 
|Total                             |  | $                       | 1,174,951 |                    | $ | 377,890     |  | $         | 281,435 |                     | $ | 134,322 |  | $ | 381,304 | 



---

|1.                                                                                                                                                        | Consists of:                                
|--------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------
|                                                                                                                                                          |                                             
|                                                                                                                                                          | (a)                                         
|                                                                                                                                                          |                                             
|                                                                                                                                                          | (b)                                         
|                                                                                                                                                          |                                             
|                                                                                                                                                          | (c)                                         
|                                                                                                                                                          |                                             
|2.                                                                                                                                                        | Consists of
  capital lease obligations for:
|                                                                                                                                                          |                                             
|                                                                                                                                                          | (a)                                         
|                                                                                                                                                          |                                             
|                                                                                                                                                          | (b)                                         
|                                                                                                                                                          |                                             
|                                                                                                                                                          | (c)                                         
|                                                                                                                                                          |                                             
|3.        Consists
  of operating lease obligations for office equipment requiring quarterly
  payments of Cdn. $161 (US $121) terminating June 2006     
|                                                                                                                                                         
|4.        Consists
  of Canadian operating line of credit bearing interest at the Canadian banks
  prime lending rate plus 0.75%, repayable upon demand.

Risk Factors

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

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

To
achieve sustained profitability, the Company must, alone or with corporate
partners and collaborators, successfully research, develop and commercialize
identified technologies or product candidates.  Current developmental
product candidates are in various stages of clinical and pre-clinical
development and will require significant further funding, research,
development, preclinical and/or clinical testing, regulatory approval and

---

commercialization
testing, and are subject to the risks of failure inherent in the development of
products based on innovative or novel technologies.  These products are
also rigorously regulated by the U.S. federal government, particularly the FDA,
and by comparable agencies in state and local jurisdictions and in foreign
countries.  Specifically, each of the following results is possible with
respect to any one of the Companys developmental product candidates:

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

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

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

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

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

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

The
Companys strategy for development and commercialization of its products is to
rely on licensing agreements with third party partners.  As a result, the
ability of the Company to commercialize future products is

---

dependent upon
the success of third parties in performing clinical trials, obtaining
regulatory approvals, manufacturing and successfully marketing its
products.  There can be no assurance that such third party collaborations
will be successful.  If any of the Companys current research and
development partnerships are discontinued, it may not be able to find others to
develop and commercialize its current product candidates.

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

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

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

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

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

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

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

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

Critical Accounting
Policies

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

---

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

Revenue
Recognition

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

Allowance
for Doubtful Accounts

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

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 recoverthe carrying value of the
asset from the expected future pre-tax cash flows (undiscounted andwithout
interest charges) of the related operations.  If these cash flows are less
than thecarrying
value of such asset, an impairment loss is recognized for the difference
betweenestimated
fair value and carrying value.  The measurement of impairment requires
management tomake estimates of these cash flows related to long-lived
assets as well as other fair valuedeterminations.

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 has funded the Joint
Ventures cumulative losses since 1992 and, accordingly, has recorded 100% of
these losses in the consolidated financial statements.

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

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

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

Changes in Accounting
Policies

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

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

Recent Accounting
Pronouncements

In
December 2004, the Financial Accounting Standards Board [the FASB] issued
FASB Statement No. 123 (Revised 2004), Share-Based Payment, which is a revision
of FASB Statement No. 123, Accounting for Stock-Based Compensation.  Statement 123(R) supercedes APB Opinion No.
25, Accounting for Stock Issued to Employees and amends FASB Statement No. 95,
Statement of Cash Flows.  Generally, the
approach in Statement 123(R) is similar to the approach described in Statement
123.  However, Statement 123(R) requires
all share-based

---

payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. 
Pro forma disclosure is no longer an alternative.  Effective February 1, 2003, the Company has
adopted the fair value accounting method provided for under Statement 123 to
apply recognition provisions to its employee stock options granted, modified or
settled after February 1, 2003. 
Statement 123(R) will have no impact on the financial statements of the
Company.

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

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

---

|         |                                                             
|-------- | ------------------------------------------------------------
|ITEM 7A. | QUANTITATIVE
  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Exchange Rate
Sensitivity

The
Companys operations consist of manufacturing activities in the United States
and 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.

Dextran Products has entered into United
States dollar forward purchase contracts, covering an aggregate of $450,000, to
lock in an exchange rate for converting United States dollars to Canadian
dollars. Dextran Products
is committed to selling $150,000 per month for the period from February 2005 to April 2005 at an exchange rate of $1.1772.

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 |           |         |  |         |   |         |        
|                            |  |                          |           |         |  |         |   |         |        
|                            |  | 1/31/06                  |           | 1/31/07 |  | 1/31/08 |   | 1/31/09 |         | 1/31/10 |  | Thereafter |   | Total |       | Fair
  Value | 
|                            |  |                          |           |         |  |         |   |         |         |         |  |            |   |       |       |              | 
|                            |  | (US$
  Equivalent)       |          
|Assets:                     |  |                          |           |         |  |         |   |         |         |         |  |            |   |       |       |              |  |   |  |  |           |   |  |           | 
|Short-term investments:     |  |                          |           |         |  |         |   |         |         |         |  |            |   |       |       |              |  |   |  |  |           |   |  |           | 
|Fixed rate ($Cdn.)          |  |                          | 2,258,842 |         |  |        |   |         |        |         |  |           |   |       |      |              |  |  |  |  | 2,258,842 |   |  | 2,271,233 | 
|Average interest rate       |  |                          | 2.45      | %       |  |        |   |         |        |         |  |           |   |       |      |              |  |  |  |  | 2.45      | % |  |           | 
|Marketable securities:      |  |                          |           |         |  |         |   |         |         |         |  |            |   |       |       |              |  |   |  |  |           |   |  |           | 
|Fixed rate ($Cdn.)          |  |                          | 596,190   |         |  | 591,488 |   |         | 676,891 |         |  |           |   |       |      |              |  |  |  |  | 1,864,569 |   |  | 1,770,130 | 
|Average interest rate       |  |                          | 2.66      | %       |  | 2.85    | % |         | 2.86    | %       |  |           |   |       |      |              |  |  |  |  | 2.79      | % |  |           | 
|                            |  |                          |           |         |  |         |   |         |         |         |  |            |   |       |       |              |  |   |  |  |           |   |  |           | 
|Liabilities:                |  |                          |           |         |  |         |   |         |         |         |  |            |   |       |       |              |  |   |  |  |           |   |  |           | 
|Foreign exchange contracts: |  |                          |           |         |  |         |   |         |         |         |  |            |   |       |       |              |  |   |  |  |           |   |  |           | 
|Forward purchase contracts  |  |                          | 450,000   |         |  |        |   |         |        |         |  |           |   |       |      |              |  |  |  |  | 450,000   |   |  | 23,203    | 
|Contract exchange rate      |  |                          | 1.1772    |         |  |        |   |         |        |         |  |           |   |       |      |              |  |  |  |  | 1.1772    |   |  |           | 
|Long-term debt:             |  |                          |           |         |  |         |   |         |         |         |  |            |   |       |       |              |  |   |  |  |           |   |  |           | 
|Fixed rate ($Cdn.)          |  |                          | 158,368   |         |  | 155,489 |   |         | 5,455   |         |  | 6,052      |   |       | 6,714 |              |  |   |  |  | 332,078   |   |  | 318,242   | 
|Average interest rate       |  |                          | 8.78      | %       |  | 8.81    | % |         | 10.43   | %       |  | 10.43      | % |       | 10.43 | %            |  |   |  |  | 8.88      | % |  |           | 

---

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 |           |         |  |         |   |         |        
|                        |  |                          |           |         |  |         |   |         |        
|                        |  | 1/31/05                  |           | 1/31/06 |  | 1/31/07 |   | 1/31/08 |         | 1/31/09 |  | Thereafter |   | Total |        | Fair 
  Value | 
|                        |  |                          |           |         |  |         |   |         |         |         |  |            |   |       |        |               | 
|                        |  | (US$
  Equivalent)       |          
|Assets:                 |  |                          |           |         |  |         |   |         |         |         |  |            |   |       |        |               |  |         |   |  |           |   |  |           | 
|Short-term investments: |  |                          |           |         |  |         |   |         |         |         |  |            |   |       |        |               |  |         |   |  |           |   |  |           | 
|Fixed rate ($Cdn.)      |  |                          | 2,258,842 |         |  |        |   |         |        |         |  |           |   |       |       |               |  |        |   |  | 2,258,842 |   |  | 2,271,233 | 
|Average interest rate   |  |                          | 2.45      | %       |  |        |   |         |        |         |  |           |   |       |       |               |  |        |   |  | 2.45      | % |  |           | 
|Marketable securities:  |  |                          |           |         |  |         |   |         |         |         |  |            |   |       |        |               |  |         |   |  |           |   |  |           | 
|Fixed rate ($Cdn.)      |  |                          | 596,190   |         |  | 591,488 |   |         | 676,891 |         |  |           |   |       |       |               |  |        |   |  | 1,864,569 |   |  | 1,770,130 | 
|Average interest rate   |  |                          | 2.66      | %       |  | 2.85    | % |         | 2.86    | %       |  |           |   |       |       |               |  |        |   |  | 2.79      | % |  |           | 
|Notes receivable:       |  |                          |           |         |  |         |   |         |         |         |  |            |   |       |        |               |  |         |   |  |           |   |  |           | 
|Variable rate ($US)     |  |                          | 58,165    |         |  | 61,655  |   |         | 65,354  |         |  | 69,275     |   |       | 73,432 |               |  | 45,493  |   |  | 373,374   |   |  | 373,374   | 
|Average interest rate   |  |                          | 6.00      | %       |  | 6.00    | % |         | 6.00    | %       |  | 6.00       | % |       | 6.00   | %             |  | 6.00    | % |  | 6.00      | % |  |           | 
|                        |  |                          |           |         |  |         |   |         |         |         |  |            |   |       |        |               |  |         |   |  |           |   |  |           | 
|Liabilities:            |  |                          |           |         |  |         |   |         |         |         |  |            |   |       |        |               |  |         |   |  |           |   |  |           | 
|Long-term debt:         |  |                          |           |         |  |         |   |         |         |         |  |            |   |       |        |               |  |         |   |  |           |   |  |           | 
|Fixed rate ($Cdn.)      |  |                          | 158,368   |         |  | 155,489 |   |         | 5,455   |         |  | 6,052      |   |       | 6,714  |               |  |        |   |  | 332,078   |   |  | 318,242   | 
|Average interest rate   |  |                          | 8.78      | %       |  | 8.81    | % |         | 10.43   | %       |  | 10.43      | % |       | 10.43  | %             |  |        |   |  | 8.88      | % |  |           | 
|Variable rate ($US)     |  |                          | 17,622    |         |  | 20,179  |   |         | 21,390  |         |  | 22,673     |   |       | 24,034 |               |  | 575,407 |   |  | 681,305   |   |  | 681,305   | 
|Average interest rate   |  |                          | 6.00      | %       |  | 6.00    | % |         | 6.00    | %       |  | 6.00       | % |       | 6.00   | %             |  | 6.00    | % |  | 6.00      | % |  |           | 

---

|        |                                              
|------- | ---------------------------------------------
|ITEM 8. | FINANCIAL
  STATEMENTS AND SUPPLEMENTARY DATA

Polydex
Pharmaceuticals Limited
Quarterly Financial Highlights
January 31, 2005

|                                             |  |                                |           |                               |  |                                |  |                               |           |      |  |           |   |      |           |      |  |           |   |  |           |  |  |           |  
|-------------------------------------------- |  | ------------------------------ | --------- | ----------------------------- |  | ------------------------------ |  | ----------------------------- | --------- | ---- |  | --------- | - | ---- | --------- | ---- |  | --------- | - |  | --------- |  |  | --------- | -
|                                             |  |                                |           |                               |  |                                |  |                               |           |      |  |           |   |      |           |      |  |           |   |  |           |  |  |           |  
|                                             |  | Fourth
  Quarter
  Fiscal Year |           | Third
  Quarter
  Fiscal Year |  | Second
  Quarter
  Fiscal Year |  | First
  Quarter
  Fiscal Year |          
|                                             |  |                                |           |                               |  |                                |  |                               |          
|                                             |  | 2005                           |           | 2004                          |  | 2005                           |  | 2004                          |           | 2005 |  | 2004      |   | 2005 |           | 2004 | 
|                                             |  |                                |           |                               |  |                                |  |                               |           |      |  |           |   |      |           |      | 
|Sales from continuing operations             |  |                                | 1,306,297 |                               |  | 4,055,997                      |  |                               | 1,205,859 |      |  | 3,681,305 |   |      | 1,338,409 |      |  | 3,058,369 |   |  | 2,521,794 |  |  | 3,296,518 |  
|Gross profit                                 |  |                                | 415,636   |                               |  | 1,022,550                      |  |                               | 219,969   |      |  | 863,653   |   |      | 473,860   |      |  | 685,005   |   |  | 875,165   |  |  | 778,288   |  
|Net income (loss) from continuing operations |  |                                | 107,036   |                               |  | 721,802                        |  |                               | (240,552  | )    |  | (201,426  | ) |      | 12,759    |      |  | (236,805  | ) |  | 1,260,668 |  |  | (289,570  | )
|Net income (loss) per common share           |  |                                | 0.04      |                               |  | 0.25                           |  |                               | (0.08     | )    |  | (0.07     | ) |      |          |      |  | (0.08     | ) |  | 0.42      |  |  | (0.10     | )

---

MANAGEMENTS
REPORT

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

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

Ernst & Young LLP, the independent auditors
appointed by the shareholders of the Company, have audited the consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States) and they provide an objective
independent opinion regarding the fair presentation of reported operating
results and financial position in accordance with generally accepted accounting
principles.

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

|                                     |                        
|------------------------------------ | -----------------------
|George G. Usher                      | Sharon Wardlaw         
|Chairman and Chief Executive Officer | Chief Financial Officer

---

REPORT
OF INDEPENDENT AUDITORS

To the Shareholders ofPolydex Pharmaceuticals Limited

We have audited the
accompanying consolidated balance sheets of Polydex
Pharmaceuticals Limitedas of January 31, 2005 and 2004 and the
related consolidated statements of shareholders equity, operations and cash
flows for each of the years in the three-year period ended January 31,
2005.  These financial statements are
the responsibility of the Companys management.  Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board
(United States).  Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. We were not
engaged to perform an audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation.  We believe that our
audits provide a reasonable basis for our opinion.

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

As described in note 2 to
the consolidated financial statements, the Company changed its accounting
policy for stock-based compensation effective February 1, 2003.

|                                   |                      
|---------------------------------- | ---------------------
|Toronto, Canada,
  March 10, 2005. | -s- Ernst & young LLP
|Chartered Accountants             

---

Polydex
Pharmaceuticals Limited

CONSOLIDATED
BALANCE SHEETS[Expressed in United States dollars]

As at January 31

|                                                            |  |          |             |           |  |             |  
|----------------------------------------------------------- |  | -------- | ----------- | --------- |  | ----------- | -
|                                                            |  | 2005
  $ |             | 2004 
  $ | 
|                                                            | 
|ASSETS[notes
  9 and 10]                                    |  |          |             |           |  |             |  
|Current                                                     |  |          |             |           |  |             |  
|Cash and cash equivalents [note 3]                          |  |          | 2,401,051   |           |  | 59,455      |  
|Trade accounts receivable [note 19]                         |  |          | 922,267     |           |  | 503,864     |  
|Interest receivable [note 12[a]]                            |  |          | 41,511      |           |  |            |  
|Inventories [note 4]                                        |  |          | 1,516,893   |           |  | 1,226,439   |  
|Prepaid expenses and other current assets                   |  |          | 115,542     |           |  | 42,730      |  
|Deferred tax assets [note 15]                               |  |          |            |           |  | 267,500     |  
|Assets subject to sale agreement [note
  12[a]]             |  |          |            |           |  | 4,285,666   |  
|                                                            | 
|Total current assets                                        |  |          | 4,997,264   |           |  | 6,385,654   |  
|Property, plant and equipment, net [note 5]                 |  |          | 3,124,185   |           |  | 3,248,342   |  
|Patents and intangible
  assets, net [note 6]               |  |          | 68,959      |           |  | 85,511      |  
|Investments available for
  sale [note
  7]                 |  |          | 1,909,305   |           |  |            |  
|Due from shareholder [note 8]                               |  |          | 643,867     |           |  | 791,006     |  
|Assets held for sale                                        |  |          | 12,085      |           |  |            |  
|Deferred tax assets [note 15]                               |  |          | 56,208      |           |  |            |  
|                                                            | 
|                                                            |  |          | 10,811,873  |           |  | 10,510,513  |  
|                                                            |  |          |             |           |  |             |  
|                                                            | 
|LIABILITIES AND SHAREHOLDERS
  EQUITY                      |  |          |             |           |  |             |  
|Current                                                     |  |          |             |           |  |             |  
|Bank indebtedness [note 9]                                  |  |          | 24,170      |           |  | 165,609     |  
|Accounts payable                                            |  |          | 463,579     |           |  | 515,092     |  
|Accrued liabilities                                         |  |          | 365,267     |           |  | 337,046     |  
|Customer deposits                                           |  |          | 97,859      |           |  | 100,925     |  
|Income taxes payable [note 15]                              |  |          | 129,702     |           |  | 923         |  
|Liabilities subject to sale agreement [note
  12[a]]        |  |          |            |           |  | 880,564     |  
|Current portion of long-term debt [note
  10[a]]            |  |          | 46,353      |           |  | 281,015     |  
|Current portion of capital lease obligations [note
  10[b]] |  |          | 157,531     |           |  | 161,253     |  
|Current portion of due to shareholder [note 8]              |  |          | 21,385      |           |  |            |  
|                                                            | 
|Total current liabilities                                   |  |          | 1,305,846   |           |  | 2,442,427   |  
|                                                            | 
|Long-term debt[note 10[a]]                                  |  |          | 4,368       |           |  | 45,517      |  
|Capital lease obligations [note 10[b]]                      |  |          | 169,344     |           |  | 284,950     |  
|Due to shareholder[note 8]                                  |  |          | 659,919     |           |  | 683,234     |  
|Deferred tax liabilities [note 15]                          |  |          | 121,507     |           |  | 147,054     |  
|                                                            | 
|Total long-term liabilities                                 |  |          | 955,138     |           |  | 1,160,755   |  
|                                                            | 
|Total liabilities                                           |  |          | 2,260,984   |           |  | 3,603,182   |  
|                                                            | 
|                                                            | 
|Shareholders equity                                        |  |          |             |           |  |             |  
|Capital stock [notes 11 and 12[b]]                          |  |          |             |           |  |             |  
|Authorized                                                  |  |          |             |           |  |             |  
|100,000 Class A
  preferred shares of $0.10 each            |  |          |             |           |  |             |  
|899,400 Class B
  preferred shares of $0.0167 each          |  |          |             |           |  |             |  
|10,000,000
  common shares of $0.0167 each                  |  |          |             |           |  |             |  
|Issued and
  outstanding                                    |  |          |             |           |  |             |  
|899,400 Class B
  preferred shares                          |  |          | 15,010      |           |  | 15,010      |  
|3,042,296 common
  shares [2004 - 3,027,796]                |  |          | 50,676      |           |  | 50,434      |  
|Contributed surplus                                         |  |          | 23,303,718  |           |  | 23,236,498  |  
|Deficit                                                     |  |          | (15,144,357 | )         |  | (16,284,268 | )
|Accumulated other comprehensive income (loss) [note 20]     |  |          | 325,842     |           |  | (110,343    | )
|                                                            | 
|Total shareholders equity                                  |  |          | 8,550,889   |           |  | 6,907,331   |  
|                                                            | 
|                                                            |  |          | 10,811,873  |           |  | 10,510,513  |  
|                                                            |  |          |             |           |  |             |  

See
accompanying notes

---

Polydex
Pharmaceuticals Limited

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

Years ended January 31, 2005, 2004 and 2003

|                                                  |  |           |        |        |  |             |  |         |            |                 |       |             |               |  |            |   |  |          
|------------------------------------------------- |  | --------- | ------ | ------ |  | ----------- |  | ------- | ---------- | --------------- | ----- | ----------- | ------------- |  | ---------- | - |  | ---------
|                                                  |  |           |        |        |  |             |  |         |            |                 |       |             | Accumulated   |  |            |   | 
|                                                  |  |           |        |        |  |             |  |         |            |                 | other |             | Total         | 
|                                                  |  | Preferred |        | Common |  | Contributed |  |         |            | comprehensive   |       |             | shareholders | 
|                                                  |  | shares    |        | shares |  | surplus     |  | Deficit |            | income
  (loss) |       | equity      |              
|                                                  |  | $         |        | $      |  | $           |  | $       |            | $               |       | $           |              
|                                                  |  |           |       
|Balance,
  January 31, 2002                       |  |           | 15,010 |        |  | 50,434      |  |         | 23,224,128 |                 |       | (15,604,528 | )             |  | (1,199,627 | ) |  | 6,485,417
|                                                  | 
|                                                  |  |           |        |        |  |             |  |         |            |                 |       |             |               |  |            |   |  |          
|Comprehensive income
  (loss):                    |  |           |        |        |  |             |  |         |            |                 |       |             |               |  |            |   |  |          
|Net loss for the year                             |  |           |       |        |  |            |  |         |           |                 |       | (673,741    | )             |  |           |   |  | (673,741 
|Currency translation adjustment                   |  |           |       |        |  |            |  |         |           |                 |       |            |               |  | 212,851    |   |  | 212,851  
|                                                  | 
|Balance,
  January 31, 2003                       |  |           | 15,010 |        |  | 50,434      |  |         | 23,224,128 |                 |       | (16,278,269 | )             |  | (986,776   | ) |  | 6,024,527
|                                                  | 
|                                                  |  |           |        |        |  |             |  |         |            |                 |       |             |               |  |            |   |  |          
|Common share options issued                       |  |           |       |        |  |            |  |         | 12,370     |                 |       |            |               |  |           |   |  | 12,370   
|Comprehensive income
  (loss):                    |  |           |        |        |  |             |  |         |            |                 |       |             |               |  |            |   |  |          
|Net loss for the year                             |  |           |       |        |  |            |  |         |           |                 |       | (5,999      | )             |  |           |   |  | (5,999   
|Currency translation adjustment                   |  |           |       |        |  |            |  |         |           |                 |       |            |               |  | 876,433    |   |  | 876,433  
|                                                  | 
|Balance,
  January 31, 2004                       |  |           | 15,010 |        |  | 50,434      |  |         | 23,236,498 |                 |       | (16,284,268 | )             |  | (110,343   | ) |  | 6,907,331
|                                                  | 
|                                                  |  |           |        |        |  |             |  |         |            |                 |       |             |               |  |            |   |  |          
|Common share options
  exercised                  |  |           |       |        |  | 242         |  |         | 53,008     |                 |       |            |               |  |           |   |  | 53,250   
|Common share options issued                       |  |           |       |        |  |            |  |         | 14,212     |                 |       |            |               |  |           |   |  | 14,212   
|Comprehensive income
  (loss):                    |  |           |        |        |  |             |  |         |            |                 |       |             |               |  |            |   |  |          
|Net income for the year                           |  |           |       |        |  |            |  |         |           |                 |       | 1,139,911   |               |  |           |   |  | 1,139,911
|Unrealized loss on investments available for sale |  |           |       |        |  |            |  |         |           |                 |       |            |               |  | (15,760    | ) |  | (15,760  
|Currency translation adjustment                   |  |           |       |        |  |            |  |         |           |                 |       |            |               |  | 451,945    |   |  | 451,945  
|                                                  | 
|Balance,
  January 31, 2005                       |  |           | 15,010 |        |  | 50,676      |  |         | 23,303,718 |                 |       | (15,144,357 | )             |  | 325,842    |   |  | 8,550,889
|                                                  |  |           |        |        |  |             |  |         |            |                 |       |             |               |  |            |   |  |          

See
accompanying notes

---

Polydex
Pharmaceuticals Limited

CONSOLIDATED
STATEMENTS OF OPERATIONS[Expressed in United States dollars]

Years ended January 31

|                                                         |  |      |           |      |  |            |   |  |            |  
|-------------------------------------------------------- |  | ---- | --------- | ---- |  | ---------- | - |  | ---------- | -
|                                                         |  | 2005 |           | 2004 |  | 2003       |  
|                                                         |  | $    |           | $    |  | $          |  
|                                                         | 
|Sales                                                    |  |      | 6,372,359 |      |  | 14,092,189 |   |  | 12,786,343 |  
|Cost of goods sold                                       |  |      | 4,387,729 |      |  | 10,742,693 |   |  | 9,528,959  |  
|                                                         | 
|Gross profit                                             |  |      | 1,984,630 |      |  | 3,349,496  |   |  | 3,257,384  |  
|                                                         | 
|                                                         |  |      |           |      |  |            |   |  |            |  
|Expenses                                                 |  |      |           |      |  |            |   |  |            |  
|General and administrative [note 11[b][i]]               |  |      | 1,438,015 |      |  | 1,937,262  |   |  | 1,659,011  |  
|Depreciation                                             |  |      | 496,543   |      |  | 592,421    |   |  | 549,946    |  
|Selling and promotion                                    |  |      | 128,731   |      |  | 158,846    |   |  | 140,281    |  
|Research and development, net [note 13]                  |  |      | 114,742   |      |  | 60,951     |   |  | 172,098    |  
|Interest, net [note 8]                                   |  |      | 91,210    |      |  | 133,382    |   |  | 150,527    |  
|Amortization                                             |  |      | 16,552    |      |  | 25,264     |   |  | 22,183     |  
|Foreign exchange (gain) loss                             |  |      | (46,172   | )    |  | 447,602    |   |  | 113,602    |  
|                                                         | 
|                                                         |  |      | 2,239,621 |      |  | 3,355,728  |   |  | 2,807,648  |  
|                                                         | 
|Income (loss) before the following                       |  |      | (254,991  | )    |  | (6,232     | ) |  | 449,736    |  
|Gain on sale of
  veterinary products assets [note12[a]] |  |      | 1,859,471 |      |  |           |   |  |           |  
|Other income (expense) [notes 12[a] and 14]              |  |      | 102,297   |      |  | (389,735   | ) |  | (372,111   | )
|                                                         | 
|Income (loss) before income taxes                        |  |      | 1,706,777 |      |  | (395,967   | ) |  | 77,625     |  
|Provision for (recovery of) income taxes [note 15]       |  |      | 566,866   |      |  | (389,968   | ) |  | 751,366    |  
|                                                         |  |      |           |      |  |            |   |  |            |  
|Net income (loss) for the year                           |  |      | 1,139,911 |      |  | (5,999     | ) |  | (673,741   | )
|Unrealized loss on investments available for sale        |  |      | (15,760   | )    |  |           |   |  |           |  
|Currency translation adjustment                          |  |      | 451,945   |      |  | 876,433    |   |  | 212,851    |  
|                                                         |  |      |           |      |  |            |   |  |            |  
|Comprehensive income (loss) for the
  year               |  |      | 1,576,096 |      |  | 870,434    |   |  | (460,890   | )
|                                                         |  |      |           |      |  |            |   |  |            |  
|                                                         |  |      |           |      |  |            |   |  |            |  
|Per share information                                    |  |      |           |      |  |            |   |  |            |  
|Earnings (loss) per common share                         |  |      |           |      |  |            |   |  |            |  
|Basic                                                    |  |      | 0.38      |      |  |           |   |  | (0.22      | )
|Diluted                                                  |  |      | 0.37      |      |  |           |   |  | (0.22      | )
|                                                         |  |      |           |      |  |            |   |  |            |  

See
accompanying notes

---

Polydex
Pharmaceuticals Limited

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

Years ended January 31



|                                                                                  |  |      |            |      |  |          |   |  |          |  
|--------------------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | -------- | - |  | -------- | -
|                                                                                  |  | 2005 |            | 2004 |  | 2003     |  
|                                                                                  |  | $    |            | $    |  | $        |  
|                                                                                  | 
|OPERATING ACTIVITIES                                                              |  |      |            |      |  |          |   |  |          |  
|Net income (loss) for the year                                                    |  |      | 1,139,911  |      |  | (5,999   | ) |  | (673,741 | )
|Add (deduct) items not affecting cash                                             |  |      |            |      |  |          |   |  |          |  
|Depreciation and
  amortization                                                   |  |      | 513,095    |      |  | 617,685  |   |  | 572,129  |  
|Imputed interest
  on long-term debt                                              |  |      | 14,648     |      |  | 25,760   |   |  | 33,177   |  
|Deferred income
  taxes                                                           |  |      | 417,003    |      |  | (414,594 | ) |  | 684,474  |  
|Loss on disposal
  of equipment                                                   |  |      | 3,586      |      |  |         |   |  |         |  
|Gain on sale of
  veterinary products business [note 12[a]]                       |  |      | (1,859,471 | )    |  |         |   |  |         |  
|License fee
  charged to due from shareholder                                     |  |      | 81,179     |      |  | 60,239   |   |  | 68,276   |  
|Provision for
  due from Sparhawk Laboratories, Inc. [note 14]                    |  |      |           |      |  |         |   |  | 132,614  |  
|Options issued
  in exchange for services [note 11[b][i]]                         |  |      | 14,212     |      |  | 12,370   |   |  |         |  
|Net change in
  non-cash working capital balances related to operations [note 16] |  |      | (634,514   | )    |  | (74,036  | ) |  | 124,630  |  
|                                                                                  | 
|Cash provided by (used in)
  operating activities                                 |  |      | (310,351   | )    |  | 221,425  |   |  | 941,559  |  
|                                                                                  | 
|                                                                                  |  |      |            |      |  |          |   |  |          |  
|INVESTING ACTIVITIES                                                              |  |      |            |      |  |          |   |  |          |  
|Additions to property, plant and equipment and
  patents                          |  |      | (159,554   | )    |  | (183,124 | ) |  | (367,868 | )
|Proceeds from
  sale of veterinary products business [note 12[a]]                 |  |      | 4,599,218  |      |  |         |   |  |         |  
|Decrease in due from shareholder                                                  |  |      | 65,960     |      |  | 129,908  |   |  | 48,713   |  
|Purchase of investments available for sale                                        |  |      | (1,841,854 | )    |  |         |   |  |         |  
|Acquisition of minority interest [note
  12[b]]                                   |  |      |           |      |  | (5,860   | ) |  |         |  
|Proceeds from sale of equipment                                                   |  |      | 5,148      |      |  |         |   |  |         |  
|                                                                                  | 
|Cash provided by (used in)
  investing activities                                 |  |      | 2,668,918  |      |  | (59,076  | ) |  | (319,155 | )
|                                                                                  | 
|                                                                                  |  |      |            |      |  |          |   |  |          |  
|FINANCING ACTIVITIES                                                              |  |      |            |      |  |          |   |  |          |  
|Repayment of long-term debt                                                       |  |      | (296,035   | )    |  | (453,805 | ) |  | (252,256 | )
|Proceeds from long-term debt                                                      |  |      | 5,383      |      |  |         |   |  |         |  
|Repayment of capital lease obligations                                            |  |      | (167,531   | )    |  | (126,703 | ) |  | (73,599  | )
|Increase (decrease) in due to shareholder                                         |  |      | (1,930     | )    |  | 1,009    |   |  | 262      |  
|Increase (decrease) in bank indebtedness                                          |  |      | (147,140   | )    |  | 165,609  |   |  | (179,286 | )
|Exercise of common share options                                                  |  |      | 53,250     |      |  |         |   |  |         |  
|                                                                                  | 
|Cash used in financing activities                                                 |  |      | (554,003   | )    |  | (413,890 | ) |  | (504,879 | )
|                                                                                  | 
|Effect of exchange rate changes on cash                                           |  |      | 224,959    |      |  | 342,321  |   |  | 39,805   |  
|                                                                                  |  |      |            |      |  |          |   |  |          |  
|                                                                                  |  |      |            |      |  |          |   |  |          |  
|Net
  increase in cash and cash equivalents during the year                       |  |      | 2,029,523  |      |  | 90,780   |   |  | 157,330  |  
|Cash, beginning of year                                                           |  |      | 371,528    |      |  | 280,748  |   |  | 123,418  |  
|                                                                                  | 
|Cash, end of year                                                                 |  |      | 2,401,051  |      |  | 371,528  |   |  | 280,748  |  
|                                                                                  |  |      |            |      |  |          |   |  |          |  
|                                                                                  |  |      |            |      |  |          |   |  |          |  
|Cash is comprised of the following                                                |  |      |            |      |  |          |   |  |          |  
|Cash                                                                              |  |      | 129,818    |      |  | 59,455   |   |  | 199,718  |  
|Cash equivalents                                                                  |  |      | 2,271,233  |      |  |         |   |  |         |  
|Cash included in
  assets subject to sale agreement [note 12[a]]                  |  |      |           |      |  | 312,073  |   |  | 81,030   |  
|                                                                                  | 
|                                                                                  |  |      | 2,401,051  |      |  | 371,528  |   |  | 280,748  |  
|                                                                                  |  |      |            |      |  |          |   |  |          |  

See
accompanying notes

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

|   |        
|-- | -------
|1. | GENERAL

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

|   |                                
|-- | -------------------------------
|2. | SIGNIFICANT ACCOUNTING POLICIES

Basis of
consolidation

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

Use of
estimates

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

Inventories

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

Investments
available for sale

Investments available for sale consist of medium-term
fixed income investments 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.

1

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

Property,
plant and equipment and patents and intangible assets

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

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

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

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

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

Revenue
recognition

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

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

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

2

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

Shipping
and handling costs

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

Research
and development

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

Foreign
currency translation

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

Derivative
financial instruments

The Companys Canadian subsidiary enters into foreign
exchange contracts 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.

Stock
options

Effective February 1, 2003, the Company has, in
accordance with Statement of Financial Accounting Standards No. 148 Accounting
for Stock-Based Compensation  Transition and Disclosure [SFAS 148],
prospectively adopted 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 after February 1,
2003.  Previously, the Company followed
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees [APB 25] and related interpretations.  Under SFAS 123, 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.  Previously, under APB 25, the
Company recognized no compensation expense when stock options were granted if
the exercise price of the stock options equaled or exceeded the market price of
the

3

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

underlying stock on the date of grant.  This change in accounting policy reduced net
income and increased contributed surplus by $14,212 [2004 - $12,370] and
reduced earnings per common share by less than $0.01 [2004 - $0.01].

Earnings
(loss) per common share

Basic earnings (loss) per common share is computed
using the weighted average number of shares outstanding of 3,037,463 for the
year ended January 31, 2005 [2004 - 3,027,796; 2003 - 3,027,777].  Diluted earnings (loss) per common share is
computed using the weighted average number of shares outstanding adjusted for
the incremental shares, using the treasury stock method, attributed to outstanding
options to purchase common stock. 
Incremental shares of 26,265 in 2005 [2004 - nil; 2003 - nil] were used
in the calculation of diluted earnings (loss) per common share.  Options to purchase 18,250, 427,935 and
431,550 common shares in 2005, 2004 and 2003, 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:

|                    |  |      |           |      |  |        | 
|------------------- |  | ---- | --------- | ---- |  | ------ | 
|                    |  | 2005 |           | 2004 | 
|                    |  | $    |           | $    | 
|                    | 
|Cash                |  |      | 129,818   |      |  | 59,455 | 
|Short-term deposits |  |      | 2,271,233 |      |  |       | 
|                    | 
|                    |  |      | 2,401,051 |      |  | 59,455 | 
|                    |  |      |           |      |  |        | 

Short-term deposits in the amount of Cdn. $2,803,675
have maturities of less than three months at the date of purchase.  Interest rates on the short-term deposits
range from 1.75% to 2.46%.

4

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

|   |            
|-- | -----------
|4. | INVENTORIES

Inventories consist of the following:

|                |  |      |           |      |  |           | 
|--------------- |  | ---- | --------- | ---- |  | --------- | 
|                |  | 2005 |           | 2004 | 
|                |  | $    |           | $    | 
|                |  |      |           |      | 
|Finished goods  |  |      | 1,187,158 |      |  | 943,373   | 
|Work-in-process |  |      | 123,730   |      |  | 107,008   | 
|Raw materials   |  |      | 206,005   |      |  | 176,058   | 
|                |  |      |           |      |  |           | 
|                |  |      | 1,516,893 |      |  | 1,226,439 | 
|                |  |      |           |      |  |           | 

|   |                              
|-- | -----------------------------
|5. | PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the
following:

|                        |  |      |           |              |             |           |      |      |           |              |  |             |  |      |           |     |  |           | 
|----------------------- |  | ---- | --------- | ------------ | ----------- | --------- | ---- | ---- | --------- | ------------ |  | ----------- |  | ---- | --------- | --- |  | --------- | 
|                        |  | 2005 |           | 2004         |            
|                        |  |      |           |              |            
|                        |  |      |           |              |             |           |      | Net  |           |              |  |             |  |      |           | Net | 
|                        |  |      |           |              | Accumulated |           | book |      |           |              |  | Accumulated |  | book |          
|                        |  | Cost |           | depreciation |             | value     |      | Cost |           | depreciation |  | value       | 
|                        |  | $    |           | $            |             | $         |      | $    |           | $            |  | $           | 
|                        |  |      |           |              |             |           |      |      |           |              |  |             | 
|Land and buildings      |  |      | 1,494,166 |              |             | 614,974   |      |      | 879,192   |              |  | 1,391,141   |  |      | 496,720   |     |  | 894,421   | 
|Machinery and equipment |  |      | 7,564,545 |              |             | 5,319,552 |      |      | 2,244,993 |              |  | 6,982,088   |  |      | 4,628,167 |     |  | 2,353,921 | 
|                        |  |      |           |              |             |           |      |      |           |              |  |             |  |      |           |     |  |           | 
|                        |  |      | 9,058,711 |              |             | 5,934,526 |      |      | 3,124,185 |              |  | 8,373,229   |  |      | 5,124,887 |     |  | 3,248,342 | 
|                        |  |      |           |              |             |           |      |      |           |              |  |             |  |      |           |     |  |           | 

Included in machinery and equipment are assets under
capital lease with a total cost of $974,472 [2004 - $981,925] and accumulated
depreciation of $444,550 [2004 - $344,348].  Depreciation of assets under capital lease is included in
depreciation expense.

5

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

|   |                              
|-- | -----------------------------
|6. | PATENTS AND INTANGIBLE ASSETS

Patents and intangible assets consist of the
following:

|                              |  |      |        |      |  |         | 
|----------------------------- |  | ---- | ------ | ---- |  | ------- | 
|                              |  | 2005 |        | 2004 | 
|                              |  | $    |        | $    | 
|                              |  |      |        |      | 
|Cost                          |  |      | 80,341 |      |  | 283,199 | 
|Less accumulated amortization |  |      | 11,382 |      |  | 197,688 | 
|                              |  |      |        |      |  |         | 
|                              |  |      | 68,959 |      |  | 85,511  | 
|                              |  |      |        |      |  |         | 

|   |                               
|-- | ------------------------------
|7. | INVESTMENTS AVAILABLE FOR SALE

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

|                                                                                                                                                            |  |      |           |      |  |   | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- |  | - | 
|                                                                                                                                                            |  | 2005 |           | 2004 | 
|                                                                                                                                                            |  | $    |           | $    | 
|                                                                                                                                                            |  |      |           |      | 
|Debt security in
  the amount of Cdn. $700,000 from the Province of Alberta bearing interest at
  7.5% and maturing on December 1, 2005                     |  |      | 588,375   |      |  |  | 
|Debt security in
  the amount of Cdn. $718,000 from GE Capital Canada bearing interest at 4.35%
  and maturing on February 6, 2006                          |  |      | 595,335   |      |  |  | 
|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 |  |      | 599,305   |      |  |  | 
|15,000 units of
  Barclays Top 100 Equal Weighted Income Fund                                                                                               |  |      | 126,290   |      |  |  | 
|                                                                                                                                                            |  |      |           |      |  |   | 
|                                                                                                                                                            |  |      | 1,909,305 |      |  |  | 
|                                                                                                                                                            |  |      |           |      |  |   | 

As at January 31, 2005, accumulated other
comprehensive income includes unrealized losses on debt securities available
for sale of $21,802 and unrealized gains on income fund trust units of
$5,438.

6

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

|   |                           
|-- | --------------------------
|8. | RELATED PARTY TRANSACTIONS

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

|                                 |  |      |          |      |  |          |  
|-------------------------------- |  | ---- | -------- | ---- |  | -------- | -
|                                 |  | 2005 |          | 2004 | 
|                                 |  | $    |          | $    | 
|                                 |  |      |          |      | 
|Amounts due from shareholder [i] |  |      | 643,867  |      |  | 791,006  |  
|                                 |  |      |          |      |  |          |  
|                                 |  |      |          |      |  |          |  
|Amounts due to shareholder [ii]  |  |      | (681,304 | )    |  | (683,234 | )
|                                 |  |      |          |      |  |          |  

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[i]  | Amounts due from shareholder are due from an officer
  and director, who is also a major shareholder of the Company [the Major Shareholder],
  and bear interest at the Canadian banks prime lending rate plus 1.5% [2005 -
  5.75%; 2004 - 5.75%], except for an amount of $535,037 [2004 - $616,216]
  which is non-interest bearing. 
  Interest income on this loan is recognized when realized.  These amounts have no fixed terms of
  repayment.  The Major Shareholder has
  pledged 323,051 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 2005, $78,168
  [2004 - $60,239; 2003 - $66,727] of license fee payments were made.  Subsequent to year end, the Major
  Shareholder passed away.  The shares
  of the Company and the Iron Dextran process license agreement passed to the
  Major Shareholders estate, along with the loans due to the Company.  The Company will continue to hold the
  pledged assets as collateral until the loan is repaid.  The Company has a commitment to pay a
  death benefit of $110,000 to the estate of the Major Shareholder by February
  2006.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|[ii] | Amounts due to shareholder bear interest at the
  Canadian banks prime lending rate plus 1.5% [2005 - 5.75%; 2004 -
  5.75%].  The Company is required to
  make monthly payments, inclusive of accrued interest, of $1,000.  Upon the death of the Major Shareholder in
  February 2005, the required monthly payment increases to $5,000.  Based on the current rate of interest, the
  principal repayment on this loan for fiscal 2006 would be approximately
  $21,000.  This loan may not be called.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

7

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

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

|                 |  |      |        |      |  |        |  |  |        | 
|---------------- |  | ---- | ------ | ---- |  | ------ |  |  | ------ | 
|                 |  | 2005 |        | 2004 |  | 2003   | 
|                 |  | $    |        | $    |  | $      | 
|                 |  |      |        |      |  |        | 
|Interest expense |  |      | 37,569 |      |  | 42,006 |  |  | 39,263 | 
|                 |  |      |        |      |  |        |  |  |        | 

|   |                  
|-- | -----------------
|9. | BANK INDEBTEDNESS

The Company has a Canadian operating line of credit of
Cdn. $1,250,000 [U.S. $1,007,000] [2004 - Cdn. $1,250,000; U.S.
$942,000], of which Cdn. $30,000 [U.S. $24,000] was utilized at
January 31, 2005 [2004 - Cdn. $150,000; U.S. $113,000].  The Canadian line of credit bears interest
at the Canadian banks prime lending rate plus 0.75% [2005 - 5%; 2004 -
5%].  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 is 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.

8

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

|    |                                               
|--- | ----------------------------------------------
|10. | LONG-TERM DEBT AND CAPITAL LEASE
  OBLIGATIONS
|    |                                               
|[a] | Long-term debt consists of the following:     

|                                                                                                                                                                                                                                                                                     |  |      |        |      |  |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------ | ---- |  | ------- | 
|                                                                                                                                                                                                                                                                                     |  | 2005 |        | 2004 | 
|                                                                                                                                                                                                                                                                                     |  | $    |        | $    | 
|                                                                                                                                                                                                                                                                                     |  |      |        |      | 
|Note payable in
  monthly payments of $5,860 maturing September 19, 2005.  The total amount of repayments are
  presented at their net present value using a discount rate of 9%.  The payments are non-interest bearing and
  are unsecured [note 12[b]]                            |  |      | 45,517 |      |  | 108,862 | 
|Note payable in
  blended quarterly payments of Cdn. $419 [U.S. $338], bearing interest at a
  fixed rate of 10%                                                                                                                                                                     |  |      | 5,204  |      |  |        | 
|Share value
  guarantee payable, repaid on March 4, 2004. 
  The total amount of repayments are presented at their net present value
  using a discount rate of 9%.  The
  payments are non-interest bearing and were collateralized by theassets of
  Veterinary Laboratories, Inc. |  |      |       |      |  | 217,670 | 
|                                                                                                                                                                                                                                                                                     |  |      |        |      |  |         | 
|                                                                                                                                                                                                                                                                                     |  |      | 50,721 |      |  | 326,532 | 
|Less current
  portion                                                                                                                                                                                                                                                               |  |      | 46,353 |      |  | 281,015 | 
|                                                                                                                                                                                                                                                                                     |  |      |        |      |  |         | 
|                                                                                                                                                                                                                                                                                     |  |      | 4,368  |      |  | 45,517  | 
|                                                                                                                                                                                                                                                                                     |  |      |        |      |  |         | 

Repayments
on the long-term debt are as follows:

|                                          |  |   |        | 
|----------------------------------------- |  | - | ------ | 
|                                          |  | $ |       
|                                          |  |   |       
|2006                                      |  |   | 47,716 | 
|2007                                      |  |   | 929    | 
|2008                                      |  |   | 1,030  | 
|2009                                      |  |   | 1,142  | 
|2010                                      |  |   | 1,267  | 
|                                          |  |   |        | 
|Total long-term debt repayments           |  |   | 52,084 | 
|Less amount representing imputed interest |  |   | 1,363  | 
|                                          |  |   |        | 
|                                          |  |   | 50,721 | 
|                                          |  |   |        | 

9

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

|    |                                                    
|--- | ---------------------------------------------------
|[b] | Capital lease obligations consist of the following:

|                                                                                                                                                                                                                                                                                                |  |      |         |      |  |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | ------- | 
|                                                                                                                                                                                                                                                                                                |  | 2005 |         | 2004 | 
|                                                                                                                                                                                                                                                                                                |  | $    |         | $    | 
|                                                                                                                                                                                                                                                                                                |  |      |         |      | 
|Obligation [Cdn.
  $308,703] under a capital lease, repayable in monthly instalments, bearing
  interest at 9% and maturing November 2006. 
  The Company has an option to purchase the asset for $89,800 [Cdn.
  $111,500] in April 2006, or at fair market value at the end of the lease term |  |      | 248,714 |      |  | 339,217 | 
|Obligation [Cdn.
  $69,253] under a capital lease, repayable in monthly instalments, bearing
  interest at 7.59% and maturing November 2006.  The Company has an option to purchase the asset for $1 at the
  end of the lease term                                                             |  |      | 55,795  |      |  | 77,783  | 
|Obligation [Cdn.
  $27,761] 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                                                  |  |      | 22,366  |      |  |        | 
|Obligation under
  a capital lease, repayable in monthly instalments, bearing interest at
  6.65% and maturing December 2004.  The
  Company purchased the asset for $1 at the end of the lease term                                                                                            |  |      |        |      |  | 29,203  | 
|                                                                                                                                                                                                                                                                                                |  |      |         |      |  |         | 
|                                                                                                                                                                                                                                                                                                |  |      | 326,875 |      |  | 446,203 | 
|Less current
  portion                                                                                                                                                                                                                                                                          |  |      | 157,531 |      |  | 161,253 | 
|                                                                                                                                                                                                                                                                                                |  |      |         |      |  |         | 
|                                                                                                                                                                                                                                                                                                |  |      | 169,344 |      |  | 284,950 | 
|                                                                                                                                                                                                                                                                                                |  |      |         |      |  |         | 

10

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

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

|                                          |  |   |         | 
|----------------------------------------- |  | - | ------- | 
|                                          |  | $ |        
|                                          |  |   |        
|2006                                      |  |   | 180,300 | 
|2007                                      |  |   | 163,034 | 
|2008                                      |  |   | 5,809   | 
|2009                                      |  |   | 5,809   | 
|2010                                      |  |   | 5,809   | 
|                                          |  |   |         | 
|Total minimum lease payments              |  |   | 360,761 | 
|Less amount representing imputed interest |  |   | 33,886  | 
|                                          |  |   |         | 
|                                          |  |   | 326,875 | 
|                                          |  |   |         | 

11.
CAPITAL STOCK

|    |                                                                                                                                                                                                                                                                              |                           
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------
|[a] | Share capital issued and
  outstanding                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                              |                           
|    | [i]                                                                                                                                                                                                                                                                          | Class
  A preferred shares
|    |                                                                                                                                                                                                                                                                              |                           
|    | The Class A preferred shares will carry dividends,
  will be convertible into common shares of the Company and will be redeemable,
  all at rates as shall be determined by resolution of the Board of
  Directors.  No Class A preferred shares
  have been issued to date.
|    |                                                                                                                                                                                                                                                                             
|    | [ii]                                                                                                                                                                                                                                                                         | Class
  B preferred shares
|    |                                                                                                                                                                                                                                                                              |                           
|    | The Class B preferred shares carry no dividends, are
  non-convertible and entitle the holder to two votes per share.                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                             
|    | [iii]                                                                                                                                                                                                                                                                        | Common
  shares           
|    |                                                                                                                                                                                                                                                                              |                           
|    | During the year ended January 31, 2005, 14,500
  common share options were exercised for $53,008 resulting in the issuance of
  14,500 common shares.                                                                                                                       

11

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------
|[b] | Share option plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                      
|    | [i]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | Options
  outstanding
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                      
|    | 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,
  2005, the Company has 86,300 options outstanding at exercise prices ranging
  from $2.50 to $7.72 and a weighted average exercise price of $4.75.  The options, which are immediately
  exercisable and expire on dates between February 1, 2005 and January 31,
  2010, entitle the holder of an option to acquire one common share of the
  Company.                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | During the year ended January 31, 2005, 4,365 common
  share options were issued to the independent directors of the Company.  These options were valued at $14,212 and
  were charged to general and administrative expense, in accordance with SFAS
  123.  The fair value for these options
  was estimated at the date of grant using the Black-Scholes option pricing
  model with the following assumptions: 
  risk-free interest rate of 3.71%; dividend yield of nil; volatility
  factor of the expected market price of the Companys common stock of 0.681,
  and an expected life of the options of five years.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | During the year ended January 31, 2004, 3,885 common
  share options were issued to the independent directors of the Company.  These options were valued at $12,370 and
  were charged to general and administrative expense, in accordance with SFAS
  123.  The fair value for these options
  was estimated at the date of grant using the Black-Scholes option pricing
  model with the following assumptions: 
  risk-free interest rate of 3.12%; dividend yield of nil; volatility
  factor of the expected market price of the Companys common stock of 0.701,
  and an expected life of the options of five years.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | 12,000 common share options granted to the
  independent directors of the Company during 2003 were not expensed as the
  Company adopted SFAS 123 prospectively in fiscal 2004.  The impact of these common share option
  grants on the earnings of the Company for 2003 if SFAS 123 had been
  adopted in that year is presented in note 11[b][ii].                                                                                                                                                                                                                                                                       

12

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

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

|                                                                 |  |                 |          |                            |  |         |   |      |         |      |                    |      |  |   |      |  |   |      | 
|---------------------------------------------------------------- |  | --------------- | -------- | -------------------------- |  | ------- | - | ---- | ------- | ---- | ------------------ | ---- |  | - | ---- |  | - | ---- | 
|                                                                 |  |                 |          |                            |  |         |   |      |         |      | Weighted
  average |     
|                                                                 |  | Share
  options |          | exercise
  price per share | 
|                                                                 |  |                 |          |                            | 
|                                                                 |  | 2005            |          | 2004                       |  | 2003    |   | 2005 |         | 2004 |                    | 2003 | 
|                                                                 |  | #               |          | #                          |  | #       |   | $    |         | $    |                    | $    | 
|                                                                 |  |                 |          |                            |  |         |   |      |         |      |                    |      | 
|Options outstanding, beginning of
  year                         |  |                 | 427,935  |                            |  | 431,550 |   |      | 419,550 |      |                    | 3.92 |  |   | 3.88 |  |   | 3.91 | 
|Granted                                                          |  |                 | 4,365    |                            |  | 3,885   |   |      | 12,000  |      |                    | 6.86 |  |   | 7.72 |  |   | 2.50 | 
|Exercised                                                        |  |                 | (14,500  | )                          |  |        |   |      |        |      |                    | 3.67 |  |   |     |  |   |     | 
|Expired                                                          |  |                 | (331,500 | )                          |  | (7,500  | ) |      |        |      |                    | 3.75 |  |   | 3.50 |  |   |     | 
|Options outstanding, end of year                                 |  |                 | 86,300   |                            |  | 427,935 |   |      | 431,550 |      |                    | 4.75 |  |   | 3.92 |  |   | 3.88 | 
|                                                                 |  |                 |          |                            |  |         |   |      |         |      |                    |      |  |   |      |  |   |      | 
|                                                                 |  |                 |          |                            |  |         |   |      |         |      |                    |      |  |   |      |  |   |      | 
|Weighted average fair value of
  options granted during the year |  |                 |          |                            |  |         |   |      |         |      | $                  | 3.26 |  | $ | 3.18 |  | $ | 1.28 | 
|                                                                 |  |                 |          |                            |  |         |   |      |         |      |                    |      |  |   |      |  |   |      | 

The
following table summarizes information relating to the options outstanding at
January 31, 2005:

|         |  |             |        |                    |                    |    |  |  |  | 
|-------- |  | ----------- | ------ | ------------------ | ------------------ | -- |  |  |  | 
|         |  |             |        |                    | Weighted
  average |   
|Exercise |  | Number      |        | remaining          |                   
|price    |  | outstanding |        | contractual
  life |                   
|$        |  |             |        |                    | [months]           |   
|         |  |             |        |                    |                    |   
|2.50     |  |             | 12,000 |                    |                    | 36 |  |  | 
|2.75     |  |             | 10,950 |                    |                    | 24 |  |  | 
|3.00     |  |             | 3,000  |                    |                    | 16 |  |  | 
|3.50     |  |             | 1,500  |                    |                    | 12 |  |  | 
|4.59     |  |             | 6,600  |                    |                    | 12 |  |  | 
|5.00     |  |             | 4,000  |                    |                    | 16 |  |  | 
|5.25     |  |             | 30,000 |                    |                    | 1  |  |  | 
|6.80     |  |             | 10,000 |                    |                    | 4  |  |  | 
|6.86     |  |             | 4,365  |                    |                    | 60 |  |  | 
|7.72     |  |             | 3,885  |                    |                    | 48 |  |  | 
|         |  |             |        |                    |                    |    |  |  | 
|         |  |             | 86,300 |                    |                    | 16 |  |  | 
|         |  |             |        |                    |                    |    |  |  | 

13

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                        
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------
| | [ii]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Pro
  forma information
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                        
| | As required by SFAS 123 [and modified by SFAS 148],
  pro forma information regarding net loss and net loss per common share has
  been determined as if the Company had accounted for its employee stock
  options under the fair value method for the year ended January 31, 2003.  The fair value for these options was
  estimated at the date of grant using the Black-Scholes option pricing model
  with the following weighted average assumptions:  risk-free interest rate of 2.96%; dividend yield of nil;
  volatility factor of the expected market price of the Companys common stock
  of 0.660; and an expected life of the options of five years.  For purposes of pro forma disclosures, the
  estimated fair value of the options is expensed immediately.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Since changes in subjective input assumptions can
  materially affect the fair value estimate, in managements opinion, the above
  pro forma adjustments for SFAS 123 are not necessarily a reliable single
  measure of the fair value of the Companys employee stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | The Companys pro forma net loss and net loss per
  common share following SFAS 123 are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

|                                                                     |  |      |          |  
|-------------------------------------------------------------------- |  | ---- | -------- | -
|                                                                     |  | 2003 |         
|                                                                     |  | $    |         
|                                                                     |  |      |         
|Net loss as reported                                                 |  |      | (673,741 | )
|Stock-based employee compensation cost using the
  fair value method |  |      | (9,216   | )
|                                                                     |  |      |          |  
|Pro
  forma net loss                                                 |  |      | (682,957 | )
|                                                                     |  |      |          |  
|                                                                     |  |      |          |  
|Pro forma net loss per common share                                  |  |      |          |  
|Basic                                                                |  |      | (0.23    | )
|Diluted                                                              |  |      | (0.23    | )
|                                                                     |  |      |          |  

14

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|12. | VETERINARY LABORATORIES, INC.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|[a] | Sparhawk
  Laboratories, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | In 1992, Veterinary Laboratories, Inc. [Vet Labs]
  and Sparhawk Laboratories, Inc. [Sparhawk] entered into the Vet Labs -
  Sparhawk Joint Venture [the Joint Venture] for the manufacture and sale of
  veterinary pharmaceutical products. 
  Vet Labs and Sparhawk each owned 50% of the Joint Venture.  The Company controlled the Joint Venture
  through its control of the Joint Venture Policy Committee and therefore
  consolidated its assets, liabilities, revenue and expenses in these consolidated
  financial statements until March 4, 2004. 
  The Company had funded the Joint Ventures losses since 1992 and,
  accordingly, has recorded 100% of these cumulative losses in the consolidated
  financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | On January 13, 2004, the Company entered into an
  Asset Purchase Agreement with Sparhawk. 
  Pursuant to this Asset Purchase Agreement, the Company agreed to sell
  the finished product veterinary pharmaceutical business, including
  substantially all of the assets of Vet Labs, to Sparhawk for $5,500,000 in
  cash. Effective March 4, 2004, this sale was completed.  Simultaneously, on March 4, 2004, Chemdex,
  Inc. [Chemdex], a wholly-owned subsidiary of the Company, advanced $350,000
  to Sparhawk in exchange for a promissory note bearing interest at 13% per
  annum and a warrant to purchase 4% of the equity of Sparhawk for no
  additional consideration.  The
  promissory note is due in full on March 4, 2009.  Interest is payable annually on the anniversary date, but can be
  deferred and added to the principal balance of the promissory note each year at
  Sparhawks discretion.  The warrant
  expires at the earlier of payment in full of the promissory note or 10 years
  from date of issue.  The warrant
  becomes exercisable the day after the fifth anniversary from the date of
  issue.  Pursuant to a definitive supply
  agreement [the Supply Agreement] entered into on March 4, 2004, Chemdex
  agreed to supply ferric hydroxide and hydrogenated dextran solution to
  Sparhawk on an exclusive basis in the United States for 10 years.  Chemdex also granted to Sparhawk an exclusive
  license to use the drug master file to manufacture 10% bulk Iron Dextran for
  veterinary use, and the use of certain equipment during the 10-year period of
  the Supply Agreement.  Pursuant to
  definitive agreements, the Company made customary representations, warranties
  and indemnities and agreed to a full release of all claims against Sparhawk
  arising from the Joint Venture litigation. 
  Similarly, Sparhawk agreed to a full release of all claims against the
  Company arising from the Joint Venture litigation.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    | The sale resulted in a gain of $2,209,471, of which
  $1,859,471 was recognized in the consolidated statements of operations and
  $350,000 was deferred.  The deferred
  gain of $350,000 relates to the promissory note receivable from Sparhawk as
  Sparhawk is thinly capitalized and highly leveraged.  The Company will monitor the financial
  position of Sparhawk and will recognize this deferred gain at such time as
  Sparhawks cash flows from operations are sufficient to fund debt service on
  a full accrual basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

| | Assets that were included in the disposal were
  reclassified to assets subject to sale agreement in the accompanying
  consolidated balance sheets as at January 31 and are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

|                                          |  |      |   |      |  |           | 
|----------------------------------------- |  | ---- | - | ---- |  | --------- | 
|                                          |  | 2005 |   | 2004 | 
|                                          |  | $    |   | $    | 
|                                          |  |      |   |      |  |           | 
|Assets subject to sale agreement          |  |      |   |      |  |           | 
|Cash                                      |  |      |  |      |  | 312,073   | 
|Trade accounts receivable                 |  |      |  |      |  | 536,868   | 
|Inventories                               |  |      |  |      |  | 1,466,873 | 
|Prepaid expenses and other current assets |  |      |  |      |  | 84,786    | 
|Land and building                         |  |      |  |      |  | 1,459,681 | 
|Machinery and equipment                   |  |      |  |      |  | 136,258   | 
|Patents and intangible assets             |  |      |  |      |  | 56,627    | 
|Deferred income taxes                     |  |      |  |      |  | 232,500   | 
|                                          |  |      |   |      |  |           | 
|                                          |  |      |  |      |  | 4,285,666 | 
|                                          |  |      |   |      |  |           | 

| | Liabilities that were assumed by the purchaser were
  reclassified to liabilities subject to sale agreement in the accompanying
  consolidated balance sheets as at January 31 and are as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                      |  |      |   |      |  |         | 
|------------------------------------- |  | ---- | - | ---- |  | ------- | 
|                                      |  | 2005 |   | 2004 | 
|                                      |  | $    |   | $    | 
|                                      |  |      |   |      |  |         | 
|Liabilities subject to sale agreement |  |      |   |      |  |         | 
|Accounts payable                      |  |      |  |      |  | 584,644 | 
|Accrued liabilities                   |  |      |  |      |  | 175,654 | 
|Due to Sparhawk Laboratories, Inc.    |  |      |  |      |  | 101,453 | 
|Customer deposits                     |  |      |  |      |  | 18,813  | 
|                                      |  |      |   |      |  |         | 
|                                      |  |      |  |      |  | 880,564 | 
|                                      |  |      |   |      |  |         | 

|    | As described in note 10[a], long-term debt of the
  Company included an amount due under a share value guarantee which arose upon
  the acquisition of Vet Labs in 1992 [note 12[c]].  This share value guarantee was collateralized by the assets of
  Vet Labs including the land and building. 
  To release the charge against the Vet Labs assets, this share value
  guarantee had to be paid in full. 
  This payment of $225,353 was made on March 4, 2004 from the sale
  proceeds.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | The Joint Venture operations comprised substantially
  all of the operations of the Chemdex segment [note 17].  Legal and receiver costs relating to the
  Joint Venture were included in other income (expense) on the consolidated
  statements of operations.                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|[b] | Acquisition
  of minority interest                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|    | On September 19, 2003, Chemdex redeemed all of the
  common shares held by the 10% minority interest shareholder, which resulted
  in the Company controlling 100% of the issued and outstanding shares of
  Chemdex.  The redemption amount was
  $146,500, which is to be                                                                                                                                                                                                                 

16

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

| |                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | paid in 25 equal monthly installments of $5,860,
  which commenced on September 19, 2003. 
  Since this installment contract is non-interest bearing, it has been
  discounted using a discount rate of 9%. 
  The present value has been recorded in long-term debt.  The Company has recorded this acquisition
  as a step purchase and has allocated the purchase price based on fair values
  of the assets as follows:

|                                                                               |  |   |         | 
|------------------------------------------------------------------------------ |  | - | ------- | 
|                                                                               |  | $ |        
|                                                                               |  |   |        
|Land and building, included in assets subject to
  sale agreement [note 12[a]] |  |   | 43,549  | 
|Equipment                                                                      |  |   | 555     | 
|Equipment, included in assets subject to sale
  agreement [note
  12[a]]       |  |   | 10,157  | 
|Patents and intangible assets                                                  |  |   | 80,341  | 
|                                                                               |  |   |         | 
|                                                                               |  |   | 134,602 | 
|                                                                               |  |   |         | 

17

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[c] | Purchase
  obligation to ContiGroup Companies, Inc. [formerly Continental Grain Company]
  [CGC]                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | In 1992, the Company acquired 100% of the issued and
  outstanding share capital of Vet Labs from CGC for a total purchase price of
  $3,894,980, which was satisfied by issuing 194,749 common shares of the
  Company.  The Company had guaranteed
  that CGC would realize a value of $3,894,980 on the eventual sale of these
  shares or CGC could put its remaining shares to the Company at such price to
  bring CGCs total consideration to $3,894,980.  CGC disposed of all of the common shares of the Company and a
  shortfall resulted.  On January 25,
  2001, the terms of the purchase agreement were revised whereby the repayment
  terms for the outstanding repurchase obligation were extended.  The revised agreement required the Company
  to make semi-annual payments of $90,000 on each of May 1 and November 1 until
  May 1, 2004 and a final payment of $105,343 on November 1, 2004.  On April 9, 2003, the terms of the
  purchase agreement were revised to amend the repayment terms for the
  outstanding repurchase obligation. 
  This revised agreement required the Company to make quarterly payments
  of $50,000 on each of May 1, August 1, November 1 and February 1 until August
  1, 2004 and a final payment of $75,343 on November 1, 2004.  This amount was included in long-term debt[note
  10[a]]and was repaid on March 4, 2004 as described in note 12[a].
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|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:

|                                      |  |      |         |      |  |         |   |  |         |  
|------------------------------------- |  | ---- | ------- | ---- |  | ------- | - |  | ------- | -
|                                      |  | 2005 |         | 2004 |  | 2003    |  
|                                      |  | $    |         | $    |  | $       |  
|                                      |  |      |         |      |  |         |  
|Research and development expenditures |  |      | 127,847 |      |  | 73,635  |   |  | 193,284 |  
|Investment tax credits                |  |      | (13,105 | )    |  | (12,684 | ) |  | (21,186 | )
|                                      |  |      |         |      |  |         |   |  |         |  
|Research
  and development expense    |  |      | 114,742 |      |  | 60,951  |   |  | 172,098 |  
|                                      |  |      |         |      |  |         |   |  |         |  

Iron Dextran process

The Company has an agreement with the Major
Shareholder 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 $78,168 [2004 - $60,239; 2003 - $66,727].  These payments are applied to the balance
owing by the Major Shareholder [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

18

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

vaginosis. 
Payments of $43,112 were made to the research organization and the
principal investigator upon execution of the agreement.  The Company is committed to make an
additional payment of $43,112 upon patient enrolment, which is expected to
occur during the summer of 2005, and a final payment of $21,556 upon completion
of the clinical study, which is expected to be near the end of fiscal year
2006.

|    |                       
|--- | ----------------------
|14. | OTHER INCOME (EXPENSE)

During the year ended January 31, 2003, an amount due
from Sparhawk of $132,614 was fully provided for and included in other income
(expense).

|    |                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|15. | INCOME TAXES                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                        
|[a] | Substantially all of the Companys activities are
  carried out through operating subsidiaries in Canada and the United
  States.  The Companys effective
  income tax rate is dependent on the tax legislation in each country and the
  operating results of each subsidiary and the parent company.
|    |                                                                                                                                                                                                                                                                                                        
|    | The components of income (loss) before income taxes
  are as follows:                                                                                                                                                                                                                                  

|              |  |      |           |      |  |          |   |  |          |  
|------------- |  | ---- | --------- | ---- |  | -------- | - |  | -------- | -
|              |  | 2005 |           | 2004 |  | 2003     |  
|              |  | $    |           | $    |  | $        |  
|              |  |      |           |      |  |          |   |  |          |  
|Bahamas       |  |      | (642,870  | )    |  | (391,641 | ) |  | (360,664 | )
|Canada        |  |      | 250,863   |      |  | 61,980   |   |  | 940,088  |  
|United States |  |      | 2,098,784 |      |  | (66,306  | ) |  | (501,799 | )
|              |  |      |           |      |  |          |   |  |          |  
|              |  |      | 1,706,777 |      |  | (395,967 | ) |  | 77,625   |  
|              |  |      |           |      |  |          |   |  |          |  

19

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

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

|                                                                                                                                 |  |       |          |       |  |          |   |  |          |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ----- | -------- | ----- |  | -------- | - |  | -------- | -
|                                                                                                                                 |  | 2005$ |          | 2004$ |  | 2003$    |  
|                                                                                                                                 |  |       |          |       |  |          |  
|Foreign
  withholding taxes and other on  Bahamian income                                                                        |  |       | 123,000  |       |  |         |   |  |         |  
|                                                                                                                                 |  |       |          |       |  |          |  
|                                                                                                                                
|Provision for
  income taxes based on Canadian statutory income tax rates                                                        |  |       | 92,819   |       |  | 22,933   |   |  | 311,357  |  
|Increase
  (decrease) in tax reserve                                                                                             |  |       | (232,739 | )     |  |         |   |  | 147,012  |  
|Increase
  (decrease) in valuation allowance                                                                                     |  |       | (36,009  | )     |  | 53,900   |   |  | 3,506    |  
|Tax rate changes
  on deferred tax items                                                                                         |  |       | 4,654    |       |  | (20,203  | ) |  | (21,612  | )
|Items not
  deductible for tax                                                                                                   |  |       | (21,859  | )     |  | 53,402   |   |  | (9,377   | )
|                                                                                                                                 |  |       |          |       |  |          |   |  |          |  
|                                                                                                                                 |  |       | (193,134 | )     |  | 110,032  |   |  | 430,886  |  
|                                                                                                                                 |  |       |          |       |  |          |   |  |          |  
|                                                                                                                                 |  |       |          |       |  |          |   |  |          |  
|Provision for
  (recovery of) income taxes based on  United States
  income tax rates                                            |  |       | 776,550  |       |  | (24,533  | ) |  | (185,666 | )
|Tax recovery on
  Joint Venture partners share of income                                                                        |  |       | (160,697 | )     |  | (132,282 | ) |  | (32,319  | )
|Tax on
  non-deductible items                                                                                                    |  |       | (23,511  | )     |  |         |   |  |         |  
|Increase
  (decrease) in valuation allowance                                                                                     |  |       | 44,658   |       |  | (343,185 | ) |  | 538,465  |  
|                                                                                                                                 |  |       |          |       |  |          |   |  |          |  
|                                                                                                                                 |  |       | 637,000  |       |  | (500,000 | ) |  | 320,480  |  
|                                                                                                                                 |  |       |          |       |  |          |   |  |          |  
|Provision for (recovery of) income
  taxes                                                                                       |  |       | 566,866  |       |  | (389,968 | ) |  | 751,366  |  
|                                                                                                                                 |  |       |          |       |  |          |   |  |          |  
|Significant components of the provision for
  (recovery of) income taxes attributable to continuing operations are as
  follows:
|                                                                                                                                 |  |       |          |       |  |          |  
|                                                                                                                                 |  | 2005$ |          | 2004$ |  | 2003$    |  
|                                                                                                                                 |  |       |          |       |  |          |  
|Canadian
  deferred tax recovery                                                                                                 |  |       | (280,453 | )     |  | (38,083  | ) |  | (21,307  | )
|Canadian
  deferred tax expense                                                                                                  |  |       | 197,456  |       |  | 128,440  |   |  | 385,301  |  
|Canadian current
  tax expense                                                                                                   |  |       | 12,863   |       |  | 19,675   |   |  | 66,892   |  
|United States
  deferred tax recovery                                                                                            |  |       |         |       |  | (500,000 | ) |  |         |  
|United States
  deferred tax expense                                                                                             |  |       | 500,000  |       |  |         |   |  | 320,480  |  
|United States
  current tax expense                                                                                              |  |       | 137,000  |       |  |         |   |  |         |  
|                                                                                                                                 |  |       |          |       |  |          |   |  |          |  
|                                                                                                                                 |  |       | 566,866  |       |  | (389,968 | ) |  | 751,366  |  
|                                                                                                                                 |  |       |          |       |  |          |   |  |          |  

20

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

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

|                                                                |  |      |          |      |  |           |   |  |           |  
|--------------------------------------------------------------- |  | ---- | -------- | ---- |  | --------- | - |  | --------- | -
|                                                                |  | 2005 |          | 2004 |  | 2003      |  
|                                                                |  | $    |          | $    |  | $         |  
|                                                                |  |      |          |      |  |           |  
|Deferred
  tax assets                                           |  |      |          |      |  |           |   |  |           |  
|Canadian                                                        |  |      |          |      |  |           |   |  |           |  
|Unclaimed research and development expenses                     |  |      | 255,485  |      |  | 307,180   |   |  | 342,000   |  
|Net capital losses [note 15[c]]                                 |  |      | 140,173  |      |  | 102,800   |   |  | 81,000    |  
|Other items                                                     |  |      | 84,566   |      |  | 90,200    |   |  | 9,000     |  
|United States                                                   |  |      |          |      |  |           |   |  |           |  
|Net operating loss carryforwards                                |  |      |         |      |  | 580,000   |   |  | 600,000   |  
|Unpaid intercompany interest                                    |  |      | 149,706  |      |  | 150,000   |   |  |          |  
|Allowance on Sparhawk note [note 12[a]]                         |  |      | 84,206   |      |  |          |   |  |          |  
|                                                                |  |      |          |      |  |           |   |  |           |  
|                                                                |  |      | 714,136  |      |  | 1,230,180 |   |  | 1,032,000 |  
|Less valuation allowance                                        |  |      | 421,160  |      |  | 627,000   |   |  | 899,207   |  
|                                                                |  |      |          |      |  |           |   |  |           |  
|                                                                |  |      | 292,976  |      |  | 603,180   |   |  | 132,793   |  
|                                                                |  |      |          |      |  |           |   |  |           |  
|                                                               
|Deferred
  tax liabilities                                      |  |      |          |      |  |           |   |  |           |  
|Excess of carrying value over tax value of
  depreciable assets |  |      | (214,560 | )    |  | (249,000  | ) |  | (160,000  | )
|Investment tax credits and other items                          |  |      | (143,715 | )    |  | (1,234    | ) |  | (22,543   | )
|                                                                |  |      |          |      |  |           |   |  |           |  
|Net
  deferred tax assets (liabilities)                         |  |      | (65,299  | )    |  | 352,946   |   |  | (49,750   | )
|                                                                |  |      |          |      |  |           |   |  |           |  

|[c] | The Canadian subsidiaries have deductions available
  to reduce future years income for tax purposes on account of net temporary
  differences resulting from expense items reported for income tax purposes in
  different periods than for financial statement purposes totalling
  approximately $974,000 and $424,000 for federal and provincial purposes,
  respectively.  Certain Canadian
  subsidiaries also have net capital losses available for carryforward of
  approximately $405,000 available to offset future taxable capital gains.  These potential deductions and net capital
  losses have an indefinite carryforward period.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|[d] | The Company has not recorded a deferred tax
  liability related to its investment in foreign subsidiaries.  The Company has determined that its
  investment in these subsidiaries is permanent in nature and does not intend
  to dispose of or realize dividends from these investments in the foreseeable
  future. However, if either of these events were to occur, the Company will be
  liable for withholding taxes.  The
  amount of the deferred tax liability related to the Companys investment in
  foreign subsidiaries is not reasonably determinable.                                                                             

21

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

|    |                                        
|--- | ---------------------------------------
|16. | CONSOLIDATED STATEMENTS OF CASH
  FLOWS

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

|                                             |  |      |          |      |  |          |   |  |          |  
|-------------------------------------------- |  | ---- | -------- | ---- |  | -------- | - |  | -------- | -
|                                             |  | 2005 |          | 2004 |  | 2003     |  
|                                             |  | $    |          | $    |  | $        |  
|                                             |  |      |          |      |  |          |  
|Decrease
  (increase) in current assets      |  |      |          |      |  |          |   |  |          |  
|Trade accounts receivable                    |  |      | (371,170 | )    |  | 402,848  |   |  | (262,397 | )
|Interest receivable                          |  |      | (41,511  | )    |  |         |   |  |         |  
|Inventories                                  |  |      | (196,214 | )    |  | (270,190 | ) |  | (111,260 | )
|Prepaid expenses and other current assets    |  |      | (69,916  | )    |  | (45,350  | ) |  | 594      |  
|                                             |  |      |          |      |  |          |   |  |          |  
|                                             |  |      | (678,811 | )    |  | 87,308   |   |  | (373,063 | )
|Increase
  (decrease) in current liabilities |  |      |          |      |  |          |   |  |          |  
|Accounts payable                             |  |      | (83,326  | )    |  | (171,739 | ) |  | 254,664  |  
|Accrued liabilities                          |  |      | 12,274   |      |  | 66,878   |   |  | 102,453  |  
|Customer deposits                            |  |      | (13,190  | )    |  | (20,660  | ) |  | 131,744  |  
|Income taxes payable                         |  |      | 128,539  |      |  | (35,823  | ) |  | 8,832    |  
|                                             |  |      |          |      |  |          |   |  |          |  
|                                             |  |      | (634,514 | )    |  | (74,036  | ) |  | 124,630  |  
|                                             |  |      |          |      |  |          |   |  |          |  

Cash paid during the year for interest was $38,993
[2004 - $65,616; 2003 - $78,087].  Cash
paid during the year for income taxes was $6,433 [2004 - $44,024; 2003 -
$11,699].

Capital equipment acquired under capital lease of
$23,137 [2004 - $78,978; 2003 - nil] were treated as non-cash additions.  During the year ended January 31, 2004,
assets of $134,602, acquired through the acquisition of minority interest, less
cash paid on date of closing of $5,860 [note 12[b]],were treated as
non-cash additions.

|    |                      
|--- | ---------------------
|17. | SEGMENTED INFORMATION

All of the operations of the Company are carried on
through Dextran Products in Canada and through Chemdex in the United
States.  The operations of Chemdex
represent the veterinary products business and the operations were carried out
through its wholly-owned subsidiary, Vet Labs. 
Vet Labs carried on its business through a Joint Venture with Sparhawk
until March 4, 2004

22

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

when the majority of this business was sold to
Sparhawk [note
12[a]].  Each of Dextran
Products and Chemdex operates as a strategic business unit offering different
products.  Each subsidiary comprises a
reportable segment as follows:

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

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

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

|                              |  |         |           |         |  |           |  |  |            | 
|----------------------------- |  | ------- | --------- | ------- |  | --------- |  |  | ---------- | 
|                              |  | 2005    |          
|                              |  |         |          
|                              |  | Dextran |           | Chemdex |  | Total     | 
|                              |  | $       |           | $       |  | $         | 
|                              |  |         |           |         |  |           | 
|Gross sales                   |  |         | 5,362,948 |         |  | 1,456,146 |  |  | 6,819,094  | 
|Intercompany sales            |  |         | 446,735   |         |  |          |  |  | 446,735    | 
|Interest expense              |  |         | 38,993    |         |  | 6,975     |  |  | 45,968     | 
|Depreciation and amortization |  |         | 496,072   |         |  | 8,505     |  |  | 504,577    | 
|Income before income taxes    |  |         | 256,169   |         |  | 2,093,478 |  |  | 2,349,647  | 
|Interest income               |  |         | 91,563    |         |  | 41,554    |  |  | 133,117    | 
|Segment assets                |  |         | 9,933,254 |         |  | 233,539   |  |  | 10,166,793 | 
|Capital expenditures          |  |         | 182,691   |         |  |          |  |  | 182,691    | 
|                              |  |         |           |         |  |           |  |  |            | 

23

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

|                                  |  |         |           |         |  |           |   |  |            |  
|--------------------------------- |  | ------- | --------- | ------- |  | --------- | - |  | ---------- | -
|                                  |  | 2004    |          
|                                  |  |         |          
|                                  |  | Dextran |           | Chemdex |  | Total     |  
|                                  |  | $       |           | $       |  | $         |  
|                                  |  |         |           |         |  |           |  
|Gross sales                       |  |         | 5,142,881 |         |  | 9,349,670 |   |  | 14,492,551 |  
|Intercompany sales                |  |         | 400,362   |         |  |          |   |  | 400,362    |  
|Interest expense                  |  |         | 48,294    |         |  | 20,883    |   |  | 69,177     |  
|Depreciation and amortization     |  |         | 459,054   |         |  | 142,844   |   |  | 601,898    |  
|Income (loss) before income taxes |  |         | 58,703    |         |  | (63,029   | ) |  | (4,326     | )
|Interest income                   |  |         | 445       |         |  |          |   |  | 445        |  
|Segment assets                    |  |         | 5,045,899 |         |  | 4,281,084 |   |  | 9,326,983  |  
|Capital expenditures              |  |         | 218,859   |         |  | 177,845   |   |  | 396,704    |  
|                                  |  |         |           |         |  |           |   |  |            |  
|                                  |  |         |           |         |  |           |   |  |            |  
|                                  |  | 2003    |          
|                                  |  |         |          
|                                  |  | Dextran |           | Chemdex |  | Total     |  
|                                  |  | $       |           | $       |  | $         |  
|                                  |  |         |           |         |  |           |  
|Gross sales                       |  |         | 4,917,446 |         |  | 8,210,984 |   |  | 13,128,430 |  
|Intercompany sales                |  |         | 342,087   |         |  |          |   |  | 342,087    |  
|Interest expense                  |  |         | 50,716    |         |  | 27,120    |   |  | 77,836     |  
|Depreciation and amortization     |  |         | 388,954   |         |  | 167,388   |   |  | 556,342    |  
|Income (loss) before income taxes |  |         | 872,291   |         |  | (247,682  | ) |  | 624,609    |  
|Interest income                   |  |         | 1,667     |         |  | 395       |   |  | 2,062      |  
|Segment assets                    |  |         | 4,918,829 |         |  | 3,569,090 |   |  | 8,487,919  |  
|Capital expenditures              |  |         | 340,203   |         |  | 27,665    |   |  | 367,868    |  
|                                  |  |         |           |         |  |           |   |  |            |  

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

|                               |  |      |           |      |  |            |   |  |            |  
|------------------------------ |  | ---- | --------- | ---- |  | ---------- | - |  | ---------- | -
|                               |  | 2005 |           | 2004 |  | 2003       |  
|                               |  | $    |           | $    |  | $          |  
|                               |  |      |           |      |  |            |  
|Gross
  sales                  |  |      |           |      |  |            |   |  |            |  
|Gross sales from segments      |  |      | 6,819,094 |      |  | 14,492,551 |   |  | 13,128,430 |  
|Intercompany sales elimination |  |      | (446,735  | )    |  | (400,362   | ) |  | (342,087   | )
|                               |  |      |           |      |  |            |   |  |            |  
|                               |  |      | 6,372,359 |      |  | 14,092,189 |   |  | 12,786,343 |  
|                               |  |      |           |      |  |            |   |  |            |  

24

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

|                                                  |  |      |           |      |  |          |  
|------------------------------------------------- |  | ---- | --------- | ---- |  | -------- | -
|                                                  |  | 2005 |           | 2004 |  | 2003     |  
|                                                  |  | $    |           | $    |  | $        |  
|                                                  |  |      |           |      |  |          |  
|Income (loss) before income taxes                 |  |      |           |      |  |          |  
|Income (loss)
  before income taxes from segments |  |      | 2,349,647 |      |  | (4,326   | )
|Unallocated corporate expenses                    |  |      | (642,870  | )    |  | (391,641 | )
|                                                  |  |      |           |      |  |          |  
|                                                  |  |      | 1,706,777 |      |  | (395,967 | )
|                                                  |  |      |           |      |  |          |  

|          |  |      |            |      | 
|--------- |  | ---- | ---------- | ---- | 
|          |  | 2005 |            | 2004 | 
|          |  | $    |            | $    | 
|          |  |      |            |      | 
|Assets    |  |      |            |      | 
|Segment   |  |      | 10,166,793 |      | 
|Corporate |  |      | 645,080    |      | 
|          |  |      |            |      | 
|          |  |      | 10,811,873 |      | 
|          |  |      |            |      | 

|                              |  |          |         |           |  |              | 
|----------------------------- |  | -------- | ------- | --------- |  | ------------ | 
|                              |  | 2005     |        
|                              |  |          |        
|                              |  | Total    |         |           |  | Consolidated | 
|                              |  | segments |         | Corporate |  | totals       | 
|                              |  | $        |         | $         |  | $            | 
|                              |  |          |         |           |  |              | 
|Other significant items       |  |          |         |           |  |              | 
|Interest expense              |  |          | 45,968  |           |  | 45,242       | 
|Depreciation and amortization |  |          | 504,577 |           |  | 8,518        | 
|Interest income               |  |          | 133,117 |           |  |             | 
|Capital expenditures          |  |          | 182,691 |           |  |             | 
|                              |  |          |         |           |  |              | 

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

25

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

|                              |  |          |         |           |  |              |  |  |         | 
|----------------------------- |  | -------- | ------- | --------- |  | ------------ |  |  | ------- | 
|                              |  | 2003     |        
|                              |  |          |        
|                              |  | Total    |         |           |  | Consolidated | 
|                              |  | segments |         | Corporate |  | totals       | 
|                              |  | $        |         | $         |  | $            | 
|                              |  |          |         |           |  |              | 
|Other significant items       |  |          |         |           |  |              |  |  |         | 
|Interest expense              |  |          | 77,836  |           |  | 72,691       |  |  | 150,527 | 
|Depreciation and amortization |  |          | 556,342 |           |  | 15,787       |  |  | 572,129 | 
|Interest income               |  |          | 2,062   |           |  |             |  |  | 2,062   | 
|Capital expenditures          |  |          | 367,868 |           |  |             |  |  | 367,868 | 
|                              |  |          |         |           |  |              |  |  |         | 

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

|              |  |      |           |      |  |            |  |  |            | 
|------------- |  | ---- | --------- | ---- |  | ---------- |  |  | ---------- | 
|              |  | 2005 |           | 2004 |  | 2003       | 
|              |  | $    |           | $    |  | $          | 
|              |  |      |           |      |  |            | 
|Europe        |  |      | 2,130,180 |      |  | 2,207,104  |  |  | 1,991,107  | 
|United States |  |      | 1,950,761 |      |  | 10,008,794 |  |  | 8,923,364  | 
|Pacific Rim   |  |      | 873,872   |      |  | 692,980    |  |  | 714,072    | 
|Canada        |  |      | 854,989   |      |  | 655,471    |  |  | 510,499    | 
|Other         |  |      | 562,557   |      |  | 527,840    |  |  | 647,301    | 
|              |  |      |           |      |  |            |  |  |            | 
|              |  |      | 6,372,359 |      |  | 14,092,189 |  |  | 12,786,343 | 
|              |  |      |           |      |  |            |  |  |            | 

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

|              |  |      |           |      |  |           | 
|------------- |  | ---- | --------- | ---- |  | --------- | 
|              |  | 2005 |           | 2004 | 
|              |  | $    |           | $    | 
|              |  |      |           |      | 
|Canada        |  |      | 3,135,872 |      |  | 3,247,473 | 
|United States |  |      | 69,357    |      |  | 1,621,828 | 
|Bahamas       |  |      |          |      |  | 8,518     | 
|              |  |      |           |      |  |           | 
|              |  |      | 3,205,229 |      |  | 4,877,819 | 
|              |  |      |           |      |  |           | 

26

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

|    |                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[e] | The following summarizes significant customer sales
  information for the years ended January 31.  Customer A is a Dextran customer, while the other customers
  were all customers of Chemdex.

|           |  |      |           |      |  |           |  |  |           | 
|---------- |  | ---- | --------- | ---- |  | --------- |  |  | --------- | 
|           |  | 2005 |           | 2004 |  | 2003      | 
|           |  | $    |           | $    |  | $         | 
|           |  |      |           |      |  |           | 
|Customer A |  |      | 886,749   |      |  | 762,330   |  |  | 815,907   | 
|Customer B |  |      | 268,186   |      |  | 1,920,282 |  |  | 1,858,236 | 
|Customer C |  |      | 246,296   |      |  | 2,133,597 |  |  | 1,590,126 | 
|Customer D |  |      | 143,258   |      |  | 1,567,135 |  |  | 1,420,554 | 
|           |  |      |           |      |  |           |  |  |           | 
|           |  |      | 1,544,489 |      |  | 6,383,344 |  |  | 5,684,823 | 
|           |  |      |           |      |  |           |  |  |           | 

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

|                                         |  |      |           |      |  |            |  |  |            | 
|---------------------------------------- |  | ---- | --------- | ---- |  | ---------- |  |  | ---------- | 
|                                         |  | 2005 |           | 2004 |  | 2003       | 
|                                         |  | $    |           | $    |  | $          | 
|                                         |  |      |           |      |  |            | 
|Bulk Dextran and derivatives             |  |      | 5,280,458 |      |  | 4,742,519  |  |  | 4,575,359  | 
|Sterile injectible
  veterinary products |  |      | 663,629   |      |  | 5,697,292  |  |  | 4,480,327  | 
|Oral and topical veterinary
  products   |  |      | 428,272   |      |  | 3,652,378  |  |  | 3,730,657  | 
|                                         |  |      |           |      |  |            |  |  |            | 
|                                         |  |      | 6,372,359 |      |  | 14,092,189 |  |  | 12,786,343 | 
|                                         |  |      |           |      |  |            |  |  |            | 

|    |                                    
|--- | -----------------------------------
|18. | FAIR VALUE OF FINANCIAL INSTRUMENTS

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

The carrying values of cash and cash equivalents,
trade accounts receivable, interest receivable and accounts payable approximate
their fair values as at January 31, 2005 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, 2005 and 2004. 
The estimated fair value of the amount due from shareholder is not
determinable because the amount has no fixed terms of repayment.

27

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
[Expressed in United States dollars except where otherwise noted]

January 31, 2005

|    |                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|19. | OTHER DISCLOSURES                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                   
|[a] | Concentration of accounts
  receivable                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                   
|    | As at January 31, 2005, three [2004 - three]
  customers of the Company comprised 61% [2004 - 59%] of the trade accounts
  receivable balance.  No other
  customers had trade accounts receivable outstanding at year end that
  represented more than 10% of the Companys trade accounts receivable balance.                                   
|    |                                                                                                                                                                                                                                                                                                                                                   
|[b] | Foreign currency risk                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                   
|    | The Company is exposed to foreign currency risk
  through its net investment in its Canadian operations.  The Company has not entered into hedging
  arrangements related to the foreign currency risk exposure.   The Company has entered into foreign
  exchange contracts to manage exposure to currency fluctuations as described
  in note 9.
|    |                                                                                                                                                                                                                                                                                                                                                   
|20. | COMPREHENSIVE INCOME (LOSS)                                                                                                                                                                                                                                                                                                                       

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

|                                                  |  |      |         |      |  |          |  
|------------------------------------------------- |  | ---- | ------- | ---- |  | -------- | -
|                                                  |  | 2005 |         | 2004 | 
|                                                  |  | $    |         | $    | 
|                                                  |  |      |         |      | 
|Unrealized loss on investments available for sale |  |      | (15,760 | )    |  |         |  
|Currency translation                              |  |      | 341,602 |      |  | (110,343 | )
|                                                  |  |      |         |      |  |          |  
|Accumulated other comprehensive
  income (loss)   |  |      | 325,842 |      |  | (110,343 | )
|                                                  |  |      |         |      |  |          |  

|    |                                 
|--- | --------------------------------
|21. | RECENT ACCOUNTING PRONOUNCEMENTS

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

In November 2004, the FASB issued Statement 151,
Inventory Costs, which clarifies that abnormal amounts of idle facility
expense, freight, handling costs and wasted materials should be

28

---

Polydex
Pharmaceuticals Limited

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS[Expressed in United States dollars except where otherwise
noted]

January 31, 2005

recognized as current-period charges and requires the
allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. 
This guidance is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. 
The Company does not anticipate that this guidance will impact the
consolidated financial statements of the Company.

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

|    |                                                
|--- | -----------------------------------------------
|22. | COMPARATIVE CONSOLIDATED FINANCIAL
  STATEMENTS

The comparative consolidated financial statements have
been reclassified from statements previously presented to conform to the
presentation of the 2005 consolidated financial statements.

29

---



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

Not
applicable.

|         |                          
|-------- | -------------------------
|ITEM 9A. | CONTROLS AND
  PROCEDURES

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

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

|         |                    
|-------- | -------------------
|ITEM 9B. | OTHER
  INFORMATION

Not
applicable.

---

PART
III

|         |                                                     
|-------- | ----------------------------------------------------
|ITEM 10. | DIRECTORS
  AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

Code of Ethics

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

|         |                         
|-------- | ------------------------
|ITEM 11. | EXECUTIVE
  COMPENSATION

The
information required under this item is incorporated herein by reference from
the material contained under the captions Board of Directors, Board Meetings
and Committees, Compensation of Executive Officers, Employment Agreements
and Company Stock Performance in the Companys definitive proxy statement to
be filed with the Securities and Exchange Commission in connection with its
2005 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 2005 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 2005 Annual
Meeting of Members.

|         |                                         
|-------- | ----------------------------------------
|ITEM 14. | PRINCIPAL
  ACCOUNTANT FEES AND SERVICES

The
information required under this item is incorporated herein by reference from
the material contained under the caption Principal Accountant Fees and
Services in the Companys definitive proxy statement to be filed with the
Securities and Exchange Commission in connection with its 2005 Annual Meeting
of Members.

---

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  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)                                                                                                                                                                                                                   
| |  |  |      |                                                                                                                                                                                                                                                       
| |  |  | 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.

---

SIGNATURES

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

|                      |                                   |                      
|--------------------- | --------------------------------- | ---------------------
|                      | POLYDEX
  PHARMACEUTICALS LIMITED
|Date:  April 29, 2005 | By:                               | /s/ George
  G. Usher
|                      |                                   |                      
|                      | George G.
  Usher, President and 
|                      | Chief
  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
  29, 2005   | /s/ George
  G. Usher                           | 
|                        |                                                 | 
|                        | George G.
  Usher, Director, President         
|                        | and Chief
  Executive Officer                  
|                        | (Principal
  Executive Officer)                
|                        |                                                 | 
|Date: 
  April 29, 2005 | /s/ Sharon
  Wardlaw                            | 
|                        |                                                 | 
|                        | Sharon
  Wardlaw, Treasurer, Secretary         
|                        | and Chief
  Financial Officer                  
|                        | (Principal
  Financial and Accounting  Officer) | 
|                        |                                                 | 
|Date: 
  April 29, 2005 | /s/ Joseph
  Buchman                            | 
|                        |                                                 | 
|                        | Joseph
  Buchman, Director                     
|                        |                                                 | 
|Date: 
  April 29, 2005 | /s/ Derek
  John Michael Lederer                | 
|                        |                                                 | 
|                        | Derek John
  Michael Lederer, Director         
|                        |                                                 | 
|Date: 
  April 29, 2005 | /s/ John L.E.
  Seidler                         | 
|                        |                                                 | 
|                        | John L.E.
  Seidler, Director                  

---

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

---