FORM 10-KSBFOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One)x
Annual Report Pursuant to Section 13 or 15(d) of the
  Securities Exchange Act of 1934 for the fiscal year ended September 30, 2008
  oro
Transition Report Pursuant to Section 13 or 15(d) of
  the Securities Exchange Act of 1934 for the transition period from ________
  to ________. Commission file Number 000-06333 HYDRON TECHNOLOGIES,
INC.(Exact name of registrant as specified in its
charter) New York
13-1574215(State or other jurisdiction of
(I.R.S. Employerincorporation or organization)
Identification No.)4400 34thStreet North, Suite F, St. Petersburg, FL 33714(Address of principal executive offices)
(Zip Code) Registrants telephone number, including area
code:(727)
342-5050 Securities registered pursuant to Section
12(b) of the Act:None Securities registered pursuant to Section
12(g) of the Act: Common
Stock, par value $.01 per share(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 the Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any other amendment
to this Form 10-K.o Indicate by
check mark whether the registrant is a shell company accelerated filer (as
defined in Exchange Act Rule 12b-2). YES o NO x The
issuers revenues for the fiscal year ended September 30, 2008 was $1,086,298 The
aggregate market value of the voting stock held by non-affiliates of the
Registrant was $232,887 based upon the closing price of $0.02 on September 30,
2008. Number of shares of Common Stock outstanding
as of December 30, 2008:19,621,176.   DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document
is incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980). None.

2

TABLE OF CONTENTS

Page No.Part IItem 1.
Description of Business
4Item 2.
Description of Properties
9Item 3.
Legal Proceedings
9Item 4.
Submission of Matters to a Vote of Security Holders
9Part IIItem 5.
Market for Registrants Common Equity, Related Stockholder Matters
  and Small Business Issuer Purchases of Equity Securities
10Item 6.
Managements Discussion and Analysis of Financial Condition and
  Results of Operation
13Item 7.
Financial Statements and Supplementary Data.
21Item 8.
Changes In and Disagreements With Accountants on Accounting and
  Financial Disclosure.
21Item 8A.(T)
Controls and Procedures.
21Item 8B.
Other Information.
23Part IIIItem 9.
Directors, Executive Officers, Control Persons and Corporate
  Governance.
23Item 10.
Executive Compensation.
25Item 11.
Security Ownership of Certain Beneficial Owners and Management and
  Related Stockholder Matters
28Item 12.
Certain Relationships and Related Transactions, and Director
  Independence.
28Item 13.
Exhibits
29Item 14.
Principal Accountant Fees and Services
35Part IVFinancial Statement Schedules
F-13

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION

Certain statements in this report contain or may contain
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
forward-looking statements were based on various factors and were derived utilizing
numerous assumptions and other factors that could cause our actual results to
differ materially from those in the forward-looking statements. These factors
include, but are not limited to, our ability to implement our business plan and
generate revenues, economic, political and market conditions and fluctuations,
government and industry regulation, U.S. and global competition, and other
factors. Most of these factors are difficult to predict accurately and are
generally beyond our control. You should consider the areas of risk described
in connection with any forward-looking statements that may be made herein.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report. Readers should
carefully review this in its entirety, including but not limited to our
financial statements and the notes thereto. Except for our ongoing obligations
to disclose material information under the Federal securities laws, we
undertake no obligation to release publicly any revisions to any
forward-looking statements, to report events or to report the occurrence of
unanticipated events.

PART
I

Item 1.
Description of BusinessIntroduction

Hydron Technologies, Inc. (the Company), a New York corporation
organized on January 30, 1948, maintains its principal office at 4400 34th
Street North, Suite F, St. Petersburg, FL 33714 and its telephone number is
(727) 342-5050.

Through September 30, 2008, Hydron Technologies, Inc. a New York
Corporation (the Company) marketed a broad range of cosmetic and oral health
care products, many using a moisture-attracting ingredient (the Hydron®
polymer) and a topical delivery system for active ingredients including
pharmaceuticals. The Company holds U.S. and international patents on, what
management believes is, the only known cosmetically acceptable method to
suspend the Hydron polymer in a stable emulsion for use in personal
care/cosmetic products. The Company also developed other personal care/cosmetic
products for consumers using its patented technology.

The Company has also developed a super-oxygenation technology for which
it was granted a patent in November 2003. This patent covers the process of
applying a liquid, containing pure oxygen micro-bubbles to the surface of the
skin such that the oxygen penetrates the skin and oxygenates the underlying
tissue. On January 10, 2005, the Company attended a Pre-Investigational Device
Exemption meeting with the FDA in the belief that a clear pathway for safety
and clinical research requirements could be determined at that time; however, a
defined methodology could not be agreed upon. As a result of that meeting, and
in consideration of the Companys limited working capital, management decided
to refocus its efforts on non-medical technologies. The Company continues to
believe that its tissue oxygenation technology has significant potential.

On November 11, 2008, the Company entered into certain agreements with
Brand Builders International, LLC, a Delaware limited liability company
(Harezi) effective October 1, 2008, relating to a joint venture between the
Company and Harezi to be formed as Brand Builders Rx, LLC, a Delaware limited
liability company (the Joint Venture). The Joint Venture was formed for the
purpose of designing, marketing, selling, and managing certain technologies and
products including, but not limited to, those contributed by the Company.

4

Brand Builders International was founded by Ilonka Harezi, the driving
force behind Teslar Technology and the Philip Stein Teslar watches. The new
Joint Venture, will combine the expertise of the two entities for the
re-positioning and re-launching of the Hydron named brands, utilizing the
marketing and distribution expertise of Ilonka Harezi, her success with the Teslar
brand and her Brand Builders International team.

During the past several years the Company has attempted to expand its
sales through various marketing efforts. The Company was unable to finance
these marketing initiatives from internally generated cash flow alone and when
required, raised the needed capital through a number of private placements in
its effort to remain solvent. Over the past year, the negative cash position
became critical and the Companys Board of Directors weighed a wide variety of alternatives,
including bankruptcy, assignment for the benefit of creditors, the selling of
assets and/or potential mergers with other parties. Only the merger option was
deemed to provide any potential benefit to existing shareholders.

The Company began discussions with Ilonka Harezi and one other
interested prospective investor during the first calendar quarter of 2008.
Because of the limited financial resources of the Company, the Company was
unable to engage an outside placement agent and instead relied on leads
obtained from the officers and directors of the Company. These discussions
failed because, at that time the Companys balance sheet and substantially
negative cash flow were significant liabilities that offset the potential value
the Company would contribute to a merger. A subsequent discussion with another
potential merger partner failed for similar reasons.

As conditions deteriorated, the Company was faced with the possibility
of immediate bankruptcy, which would have effectively eliminated all shareholder
equity. The Companys Board of Directors sought ways to quickly and decisively
protect shareholder value. Talks were reopened with Ms. Harezi and initial
terms to create a 50/50% LLC were agreed upon in principle.

Under the terms of the proposed Agreement, the Company would contribute
cash and substantially all of its operating assets, in addition it would
license its patented technologies to the Joint Venture. Harezi would contribute
cash, on-going financing, and a new headquarters and provide sales and
marketing expertise, including public relations, the filming of television
commercials, production of print media and the building of a sales force in the
United States and internationally. The proposed Agreement was contingent upon
the Company eliminating all debt and being current on its payables.

Faced with the necessity to raise the money required to meet the terms
of the Joint Venture Agreement and to fund the Companys anticipated expenses
until the Joint Venture is expected to deliver results, the Board concluded
that the best available option for the Company was to raise the funds by
soliciting interest in the Companys only other salable asset, the
potential value of the cross-royalty arrangement with Valera Pharmaceuticals,
Inc. (Valera), which is held indirectly by the Company through its interest
in Hydron Royalty Partners, Ltd., LLLP, a Florida limited partnership (the
Partnership). Based on the Companys balance sheet, debt position, and the
results of other options explored to date, the Company determined that no other
available option would raise the necessary funds in the timeframe
necessary to complete the Joint Venture.

5

On July 2, by Unanimous Written Consent, the Board of Directors
authorized an amendment to its Certificate of Incorporation (the Certificate)
to designated the terms of a Series A Preferred Shares offering from authorized
undesignated share of Preferred Stock as allowed by its Certificate and New
York law. On July 30, the Company closed on a $1.3 million private placement of
Series A Preferred Shares which was raised primarily through existing
accredited Hydron common shareholders.

Following the closing of the Series A Preferred Shares offering, funds
received by the Company relating to any royalties derived by the Partnership
from the Valera Agreement will be paid as dividends to the extent legally
available to holders of the Series A Preferred Shares, subject to the terms of
the Series A Preferred Shares and New York law. Holders of the Series A
Preferred Shares are not entitled to receive dividends or other distributions,
other than the stated value of their shares, derived from any other revenues of
the Company, including distributions, if any, made to the Company by the Joint
Venture.

Patented Technology

The Company believes that technology and patent protection are
essential to providing a sound foundation for a new product. In January 2006,
the Company was granted U.S. Patent Number 6,984,391 for its Compositions and
Method for Delivery of Skin Cosmeceuticals that covers the Companys unique
self-adjusting pH emulsion system which the Company believes is a significant
breakthrough in skin care. It is evident in recent skin research that the pH
range of the skin is essential in contributing to the skins natural healing
process and the enzyme production responsible for rebuilding fully mature and
health skin cells. The benefits provided by this pH self-adjusting system
provides clinically proven benefits over competitive products

The Company was granted a U.S. patent on its super-oxygenation
technology in November 2003. This patent covers the process of applying a
liquid, containing pure oxygen micro-bubbles to the surface of the skin such
that the oxygen penetrates the skin and oxygenates the underlying tissue. The
Company has applied for international patents on this technology in
approximately 29 countries, which are in various stages of review as of
September 30, 2008.

The Company was granted U.S. Patent No. 4,883,659, dated November 28,
1989, and U.S. Patent No. 5,039,516, dated August 13, 1991, which cover a
stable moisturizing emulsion containing an unusual emulsifying agent, as well
as the Hydron polymer and a unique combination of ingredients. These patents
expired on November 28, 2006 and August 13, 2008, respectively. During 1999 the
Company was granted U.S. Patent No. 5,879,684 for its Line Smoothing Complex
formula. This product has been clinically shown to reduce fine lines and
wrinkles. The patent has an expiration date of April 11, 2017. In addition, the
Company has registered several trademarks relating to its cosmetic products.

The Company has also received patent protection for its emulsification
process in several countries to facilitate distribution and sale of these
products outside of the United States. The Hydron polymer, utilized in cosmetic
emulsions, creates a thin moisture-attracting film that is non-greasy; is not
dissolved by sebaceous oils or perspiration; does not emulsify the skins
natural oils and humectants; and allows the skin to breathe. The film is
insoluble in water and resistant to rub-off, but can easily be removed with
cleanser and water.

6

Agreement with Valera Pharmaceuticals (Valera)

Pursuant to an agreement dated June 25, 1976, the Company, then known
as Dento-Med Industries, Inc., entered into an agreement (the Original
Agreement) with The National Patent Development Corporation (now known as GP
Strategies) relating to certain products composed wholly or partly of the
Hydron polymer (the Polymer). The Original Agreement has been amended in
several significant respects by an agreement dated November 30, 1989 that
amends and restates the Original Agreement (the Current Agreement; and, as so
amended and restated, the Hydron Agreement). In June 2000, GP Strategies
decided to reorganize and in connection with this reorganization contributed
the Hydron Agreement to its subsidiary, Hydro Med Sciences, Inc., now known as
Valera, as part of a spin-off of its drug delivery system business. In April
2007, Valera was acquired by Indevus Pharmaceuticals, Inc. (Indevus).

The Hydron Agreement provides for certain cross-royalty payments by its
parties, and also grants rights to each party to certain intellectual property
and the right to develop certain Products (as defined below) that include the
Polymer. Under the terms of the Hydron Agreement, the parties are required to
pay royalties to each other of five percent (5%) of such partys net sales of
products produced with the use of the Polymer (Products), other than certain
Products or within certain fields set forth in a schedule to the Hydron
Agreement.

Pursuant to the Hydron Agreement, the Company was granted an exclusive,
worldwide license to manufacture, market or use products composed of, or
produced with the use of, the Polymer in certain consumer and oral health
fields while Valera was granted the exclusive right to manufacture, sell or
distribute any prescription drug or medical device and certain other products
made with the Polymer. The agreement continues indefinitely, unless terminated
earlier by the parties. To date, only the Company has been obligated to make
royalty payments under the Hydron Agreement. However, based on a review of
reports filed by Indevus with the Securities Exchange Commission and a review
of Indevuss website, the Company understands that Valera has Products under
development that represent potential royalty payments to the Company under the
Hydron Agreement. There can be no assurance that any such Products will ever be
brought to market or, if they are brought to market, the amount or timing of
any future royalty payments that may be payable to the Company under the Hydron
Agreement.

In August 2004, the Company contributed its rights under the Hydron
Agreement the Partnership pursuant to the terms of a Capital Contribution and
License Agreement (the Contribution Agreement). Under the Contribution
Agreement, in consideration of the contribution of its rights under the Hydron
Agreement, the Company received a 50.001% interest in the Partnership; and the
Partnership agreed to (i) pay the Companys then outstanding royalty payment
obligations to Valera under the Hydron Agreement and future royalty obligations
payable to Valera up to an aggregate of $300,000, and (ii) license back to the
Company all rights granted to the Company under the Hydron Agreement on an
exclusive world-wide royalty free basis with the right to grant sublicenses
there under, and to manufacture, sell or distribute any product permitted to be
manufactured, sold or distributed by the Company under the Hydron Agreement.

The Company is the General Partner of the Partnership. Under the terms
of the Partnerships Limited Liability Limited Partnership Agreement (the
Partnership Agreement), the Partnerships limited partners may, by the
affirmative vote of all of the partners who are not affiliates of the General
Partner, remove the General Partner for certain specified reasons, including
the breach by the Company of its obligations under the Contribution Agreement,
including the Companys obligation to make royalty payments owed under the
Hydron Agreement to Valera.

7

Under the
terms of the Partnership Agreement, each partner is entitled to receive
distributions from available funds including royalty payments received under
the Hydron Agreement in proportion to its respective interest in the
Partnership.

Under the Valera Agreement an aggregate of $5,069 and $12,275 was
accrued and unpaid as of September 30, 2008 and 2007, respectively. For the
twelve month periods ended September 30, 2008 and 2007, the Company recorded
royalty expenses of $13,785 and $5,168, respectively. While the Company has not
received any royalty payments, or been advised of any sales that would entitle
it to royalty payments to date, according to the Indevus website, certain
Hydron implant milestones are noteworthy:


Indevus currently markets two (2) once-yearly Hydron Implants. Both
  products, one addressing prostate cancer and the other addressing central
  precocious puberty, were specifically excluded from the cross-royalty
  agreement. To date, to the extent of the Companys belief, these implants are
  providing appropriate dosing for the life of the implant.
On November 28, 2007, Indevus reported positive results from a Phase
  II Octreotide Implant trial, along with their expectation that a Phase III
  trial will begin in the first half of 2008. If ultimately successful in
  bringing the Octreotide implant to market, this implant is likely to be the
  first product subject to the cross-royalty arrangement.
On September
  30, 2008,Indevus announced the
  initiation of a Phase III clinical trial of the Octreotide Implant for
  AcromegalyLimited
Liability Partnership

In August 2004, The Company established the partnership, to fund the
then existing royalty obligations in consideration for the right to receive
future royalty receipts from Valera. Hydron Technologies, Inc., the general
partner, assigned its rights in the Valera Agreement to the Partnership. The
Partnership assumed the existing liability for prior period royalties
($127,984) and will annually pay the first $30,000 of any future royalties due
to Valera in return for the right to receive any future royalties that may be
due from Valera on their new products. The Company, as general partner, holds
50.001% of the partnership interests, and the limited partnership interests
represent in the aggregate the remaining 49.999%.

As discussed above in the Introduction of this Item 1, under the
terms of the Series A Preferred Shares, holders of Series A Preferred Shares
will receive dividends from funds received from the Partnership relating to any
royalties received from Valera to the extent legally available.

Inventory

Effective with
the Joint Venture Agreement, the Company contributed its existing inventory to
the Joint Venture.

Government
Regulation

The Companys oxygenation process uses pure oxygen, which is a natural
substance and is not controlled. However, the containers, devices used, and the
handling of oxygen require the Food and Drug Administrations approval (FDA).
The Company complies with the Federal Food, Drug and Cosmetic Act (FDC Act)
and must comply with the labeling requirements of the FDC Act, the Fair
Packaging and Labeling Act (FPL Act), and the regulations there under. Many
products and applications that are derived from Hydrons oxygenation technology
will be considered medical in nature and FDA approval will be required for this
area. New skin care products and most of the Companys existing products are
cosmetics as that term is defined under the FDC Act. Some of the Companys
products (i.e. its topical analgesic and products that contain a sunscreen or
Triclosan) are also classified as over-the-counter drugs.

8

Additional regulatory requirements for existing products include
certain labeling requirements, registration of the manufacturer and semi-annual
update of the drug list. Management believes that it is in compliance with
these requirements and that it faces no material costs associated with such
compliance.

Competition

The skin care business is characterized by vigorous competition
throughout the world. Product recognition, quality, performance and price have
significant influence on customers choices among competing products and
brands. Advertising, promotion, merchandising, the pace and timing of new
product introductions and line extensions also have a significant impact on
consumer buying decisions. The Company competes against a number of marketers
of skin care products, many of which have substantially greater resources than
the Company.

Seasonality

The Companys
results of operations are not subject to seasonal fluctuations.

Employees

Throughout fiscal 2008, the Company satisfied its human resource needs
utilizing an outsourcing firm that provided all administrative services
relating to payroll, personnel and employee benefits. Management continued to
hire, fire, set pay rates and supervised its staff. This arrangement enabled
the Company to reduce its administrative and benefits costs relating to
employees. The Company, as of September 30, 2008, had twenty two full time
positions. Effective with the formation of the JV, the Company will no longer
require employees, decisions affecting it affairs will be managed by its Board
of Directors.

Item 2.
Description of PropertiesThrough September 30, 2008, the Company leased office space at 4400 34th
Street North, Suite F under a lease on a month to month basis in St.
Petersburg, Florida. The lease on this office space (7,000 square feet)
required a monthly rent of approximately $3,550, including taxes and common
area expenses.

Item 3.
Legal ProceedingsThe Company is
not a party to, and its property is not the subject of, any material pending
legal proceedings.

Item 4.
Submission of Matters to a Vote of Security
  HoldersNone

9

PART II

Item 5.
Market For Registrants Common Equity, Related Stockholder Matters
  and Small Business Issuer Purchases of Equity SecuritiesMarket Information

Our common stock is quoted on the OTC Bulletin Board under the symbol
HTEC.OB. The following table sets forth the reported high and low closing bid
prices for our common stock as reported on the OTC Bulletin Board for the
following periods. These prices do not include retail mark-ups, markdowns or
commissions, and may not necessarily represent actual transactions.

High

LowFiscal 2007October 1,
  2006 - December 31, 2006

$
.30

$
.10January 1,
  2007 - March 31, 2007

$
.20

$
.17April 1,
  2007 - June 30, 2007

$
.29

$
.17July 1, 2007
  - September 30, 2007

$
.22

$
.12Fiscal 2008October 1,
  2007 - December 31, 2007

$
.19

$
.07January 1,
  2008 - March 31, 2008

$
.30

$
.07April 1,
  2008 - June 30, 2008

$
.20

$
.04June 1, 2008
  - September 30, 2008

$
.15

$
.02As of
September 30, 2008, there were approximately 1,027 shareholders of record of
the Companys Common Stock.

Dividends and
Dividend Policy

The Company does not contemplate paying dividends in the near-term. The
Board of Directors will determine the payment of dividends in the future in
light of conditions then existing, including the Companys earnings and
financial condition.

Purchases
of Equity Securities by the Issuer and Affiliated Purchasers

None.

Securities
Authorized for Issuance under Equity Compensation Plans

The following table sets forth securities authorized for issuance under
any equity compensation plans approved by our stockholders as well as any
equity compensation plans not approved by our stockholders as of September 30,
2008.

10

Equity
Compensation Plan Information

The following table summarizes share information about the Companys
equity compensation plans, including the companys Stock Option Plan (the
Plan) and non-plan equity compensation agreements as of September 30, 2008:

Equity
  compensation plans approved by security holders


1,151,500

$
0.33


(1
)Equity
  compensation plans not approved by security holders


37,000

$
0.43


(1
)Total


1,188,500

$
0.33(1)
The 2003 Stock Plan was approved at the November 15, 2004
  shareholders meeting. The aggregate number of shares that may be issued
  under the Plan cannot exceed 15% of the total outstanding shares. As of
  September 30, 2008, the number of Securities for future issuance under the
  2003 Stock Plan was 1,891,676 and 159,100 for all previous plans.Equity
Compensation Plans Approved by Shareholders

On November 19, 2003, the Board approved, subject to shareholder
approval, the 2003 Stock Plan (the 2003 Plan). The shareholders approved this
plan on November 15, 2004. The 2003 Plan permits the grant of nonqualified and
incentive stock options, as well as restricted stock purchases. The form of the
equity is left up to the discretion of the committee of the Board (or the Board,
if no committee) at the time of each grant. This 2003 Plan is designed to
consolidate and replace two Stock Option Plans, which have expired; the 1993
Stock Option Plan and the 1997 Non-Employee Director Stock Option Plan. The
purpose of the 2003 Plan is to assist the Company in attracting, retaining, and
motivating key employees, officers, directors, and consultants by offering
selected individuals an opportunity to acquire a proprietary interest in the
success of the Company.

The Board of Directors had approved the issuance of 943,500 options in
prior periods subject to the adoption of a new stock plan at the November 15,
2004 shareholders meeting. All of these options have been reflected as being
granted in 2004.

Options to
purchase 65,000 shares were granted to employees during the year ended
September 30, 2008.

On January 25, 2005, the Board of Directors, by unanimous consent,
re-authorized the issuance of 743,500 stock options from the 2003 Stock Plan to
Directors and Officers of the Company. Since
the original approval date was more than 12 months before the shareholder
adoption of the 2003 Stock Plan, the options had to be re-authorized to include
them under the plan.

Equity
Compensation Plans Not Approved by Shareholders

The Company has agreements with several consultants who provide
financial, business, and technical advice to the Company in connection with the
research, development, marketing and promotion of its products and other
matters. As part of their compensation, these consultants were granted warrants
and nonqualified stock options to purchase shares of the Companys common stock
at prices representing the fair market value of the shares at the date of
grant.

11

Recent
Sales of Unregistered Securities

On October 3, 2007, the Company, closed on a private offering of
1,400,000 units (Units), comprised of one (1) share (Share) of its Common
Stock and one (1) warrant (Warrant) for the purchase of one (1) share of
Common Stock. The Company received gross proceeds of One Hundred Seventy Five
Thousand Dollars ($175,000) from the sale of Units in the Offering.

Among the individuals who purchased Units in the Offering is Ronald J.
Saul, a director of the Company who together with his spouse purchased 300,000
Units pursuant to two separate subscription agreements. Mr. Saul and his spouse
paid for 200,000 Units by the cancellation of certain indebtedness owed to them
by the Company evidenced by a promissory note in the principal amount of Twenty
Five Thousand Dollars ($25,000) and paid for 100,000 Units by payment in cash.

On October 30, 2007, the Company, closed on a private offering of
400,000 units (Units), comprised of one (1) share (Share) of its Common
Stock and one (1) warrant (Warrant) for the purchase of one (1) share of
Common Stock of the Company for each Unit purchased or a total of 400,000
Shares and 400,000 Warrants to purchase Shares. The Company received gross cash
proceeds of Fifty Thousand Dollars ($50,000) from the sale of Units in the
Offering.

Ronald J. Saul, a director of the Company, purchased the 400,000 Units
together with his spouse pursuant to a subscription agreement dated October 30,
2007.

On January 23, 2008, the Company, closed on a private offering of
600,000 units (Units), comprised of one (1) share (Share) of its Common
Stock and one (1) warrant (Warrant) for the purchase of one (1) share of
Common Stock. The Company received gross proceeds of Seventy Five Thousand
Dollars ($75,000) from the sale of Units in the Offering.

Among the individuals who purchased Units in the Offering is Ronald J.
Saul, a director of the Company who together with his spouse purchased 200,000
Units and Richard Banakus, the Chairman, interim president and a director of
the Company, who purchased 200,000 units pursuant to a subscription agreement.

On July 30, 2008, the Company closed on a private offering of thirteen
thousand (13,000) of its Series A Preferred Shares. The Company received
aggregate gross proceeds of One Million Three Hundred Thousand Dollars
($1,300,000) from the sale of the Series A Preferred Shares in the offering.
After issuance of the Series A Preferred Shares sold in the offering, the
Company has a total of 13,000 Series A Preferred Shares outstanding.

Among the individuals who purchased Series A Preferred Shares in the
Offering are (i) Richard Banakus, the Chairman, interim President and a
director of the Company, who purchased 5,270 shares pursuant to a subscription
agreement providing for payment by the cancellation of two promissory notes
representing obligations of the Company to Mr. Banakus in the original
principal amounts of $50,000 and $40,000 and the payment of $437,000 in cash;
(ii) Ronald J. Saul, a director of the Company who together with his spouse
purchased 1,500 shares pursuant to a subscription agreement providing for
payment by the cancellation of two promissory notes representing obligations of
the Company to Mr. Saul and his spouse in the original principal amounts of
$100,000 and $50,000; and (iii) Karen Gray, a director of the Company who
purchased 100 shares pursuant to a subscription agreement providing for payment
of $10,000 in cash.

12

Item 6.
Managements Discussions and Analysis of
  Financial Condition and Results of OperationsOverview

In November 2003, the Company was granted a patent on its new
oxygenation technology that provides a method for delivering oxygen into the
skin and tissue at depths considered medically therapeutic. This unique
technology utilizes topical applications, eliminating reliance on the blood
stream. Preliminary research was conducted at the University of Massachusetts
and Florida Atlantic University and the process to obtain FDA approval was
initiated. Management plans to research additional medical applications if and
when Hydron obtains FDA approval.

The Company raised $1.1 million in December 2003 in a non-brokered
private placement exempt from registration under the Securities Act to fund the
initial research and initiate the lengthy FDA approval process. As research
results begin to quantify the broad applications of this technology and the FDA
hurdles are passed, management anticipates that Hydron will attract key
strategic partners and new investment money will become available. Management
also expects that product development will accelerate in medical areas such as
wound and burn treatment, and skin care applications such as scar reduction,
acne, and diaper rash treatment, oral health, etc.

In August 2004, Hydron, as general partner, formed the Partnership for
the purpose of funding existing royalty obligations and a portion of future
royalty obligations in consideration of sharing future royalty income that may
arise from Hydrons agreement with Valera. The Partnership completed a
non-brokered private placement of Limited Partnership Interest to ten
accredited investors including Hydrons Chairman, Richard Banakus and a Hydron
Director, Ronald J. Saul. Each limited partner invested $30,000 or an aggregate
of $300,000 for a 49.999% interest in the Partnership. The establishment of the
Partnership allowed Hydron to meet its current and future royalty obligations
and retain the possibility of a significant royalty income stream opportunity.

In late January 2005, the Company refocused its efforts to skin care
formulations and sales. On July 1, 2005, the Company purchased CRI, Inc. and
BRI, Inc., related companies providing both skin care formulation consulting
and a newly started contract manufacturing business. The Company believes that
the vertical capabilities added by this acquisition will be beneficial to the
Company as it expands beyond its historical base.

In January 2006, the Company was granted U.S. Patent Number 6,984,391
for its Compositions and Method for Delivery of Skin Cosmeceuticals, which also
applies to a new acne treatment system. The Company believes that this unique
emulsion system has significant advantages over the widely used surfactant
emulsions employed by most skin care formulators and manufacturers, and will
seek licensing opportunities whenever possible.

On November 11, 2008, the Company entered into certain agreements with
Brand Builders International, LLC, a Delaware limited liability company
(Harezi) effective October 1, 2008, relating to a joint venture between the
Company and Harezi to be formed as Brand Builders Rx, LLC, a Delaware limited
liability company (the Joint Venture). The Joint Venture was formed for the
purpose of designing, marketing, selling, and managing certain technologies and
products including, but not limited to, those contributed by the Company.

13

Results
of Operations - 2008 versus 2007

Total net sales for the fiscal year ended September 30, 2008 were
$1,086,298, a decrease of $93,141 or 8% from net sales of $1,179,439 for the
fiscal year ended September 30, 2007. Catalog Sales net sales for the fiscal
year ended September 30, 2008 were $502,277, a decrease of $38,096 or 7% from
sales of the fiscal year ended September 30, 2007 of $540,373. Private Label
and Contract Manufacturing net sales for fiscal year ended September 30, 2008
were $508,096, a decrease of $69,378 or 12% from sales the fiscal year ended
September 30, 2007 of $577,474. Shipping and handling revenues for the fiscal
year ended September 30, 2008 were $64,250, an increase of $2,658 or 5% from
shipping and handling revenues for the fiscal year ended September 30, 2007 of
$61,592.

The decrease in catalog sales was the result
of the attrition of the Companys customer base without marketing spending to
replace those customers. Private Label Manufacturing sales
decreased due to the timing of shipments to contact manufacturing customers.

For the fiscal year ended September 30, 2008 cost of sales was
$576,269, an increase of $70,749 or 14% from cost of sales of $505,520 for the fiscal year ended September 30, 2007.
Cost of sales was 53% of total net sales for the fiscal year ended September 30, 2008, compared to 43% for the fiscal year ended
September 30, 2007.
Shipping and handling costs for the fiscal year ended September 30, 2008 were
$93,801, an increase of $29,234 or 46% from shipping and handling costs of
$64,567 for the fiscal year ended
September 30, 2007. This increase reflects the increase in postage rates
and a refund from a shipper in 2007 for prior disputed amounts

The Companys overall gross profit margin decreased to 47% of net sales
for the fiscal year ended September 30, 2008 versus 58% for the fiscal year
ended September 30, 2007.

For the fiscal year ended September 30, 2008 and 2007, the Company
recorded royalty expenses of $10,770 and $5,168, respectively. An aggregate of
$5,069 was accrued and unpaid as of September 30, 2008. This amount is adequate
to cover any royalties that are payable through September 30, 2008.

Research and development (R&D) expenses reflect the Companys
efforts to identify new product opportunities, obtain regulatory approval,
develop and package the products for commercial sale, perform appropriate
efficacy and safety tests, and conduct consumer panel studies and focus groups.
R&D expenses were $2,161 for the fiscal year ended September 30, 2008, a
decrease of $1,993 or 48% from R&D expenses of $4,154 for the fiscal year
ended September 30, 2007. The amount
of annual R&D expenses will vary year to year depending on the Companys
research requirements.

Selling, general and administrative (SG&A) expenses for the
fiscal year ended September 30, 2008 were $1,060,740, representing a decrease
of $201,652 or 16% from SG&A expenses of $1,262,392 for the fiscal year
ended September 30, 2007. Employment expense was $483,577 for the fiscal year ended
September 30, 2008, a decrease of $57,440, or 11%, from $541,017 for the fiscal year ended September 30,
2007. This decrease is due primarily to staff reductions and pay cuts by
management as cost cutting initiatives. Rent expense was $109,188 for the fiscal
year ended September 30, 2008, a decrease of $9,024, or 8% from $118,212 for
the fiscal year ended September 30, 2007. The decrease in rent is due primarily
to the Company being relieved as of July 31, 2008 of its lease commitment for
space occupied in Unit E by the landlord. Professional expenses (legal and
audit) was $108,234 for the fiscal year ended September 30, 2008, a decrease of
$124,713 or 54% from $232,947 for the fiscal year ended September 30, 2007.
This decrease is due primarily due to less legal expense incurred. Settlement
expense was $0 for the fiscal year ended September 30, 2008, a decrease of
$38,404, or 100% from $38,404 for the fiscal year ended September 30, 2007. The
decrease in settlement expense was due to the Company resolving a dispute with
a customer in 2007. All other expenses were $359,741 for the fiscal year ended
September 30, 2008, an increase of $27,929 or 8% from $331,812 for the fiscal
year ended September 30, 2007.

14

Depreciation and amortization expense for the fiscal year ended
September 30, 2008 was $92,047, a decrease of $7,133 or 8% from $99,180 for the
fiscal year ended September 30, 2007.

Net interest (expense) was ($65,656) for the fiscal year ended
September 30, 2008 compared to net interest (expense) of ($69,096) for the
fiscal year September 30, 2007. The decrease in interest expense was due
primarily to the interest on the loan payable and amortization of related debt
discount

Minority interest in net loss for the fiscal year September 30, 2008
was $22,153 compared to $20,952 for the fiscal year ended September 30, 2007.
This minority interest is created from the Partnership, a consolidated limited
liability partnership, established by the Company in August 2004 (see Limited
Liability Partnership, Item 1. Business).

The Company had a net loss of $699,192 for the fiscal year ended
September 30, 2008, representing a decrease of $45,927 or 7% from the net loss
of $745,119 for the fiscal year ended September 30, 2007, primarily as a result
of the factors discussed above.

Liquidity and
Capital Resources

As a consequence of its participation in the Joint Venture, the
Companys need for cash is no longer tied to funding the working capital and
other capital requirement of an operating business. Other than the obligation
to pay dividends on the Series A Preferred Shares to the extent of
distributions received from the Partnership from funds legally available, the
Company will only have certain administrative costs, including legal and
accounting costs relating to the preparation and filing of periodic reports
with the Securities and Exchange Commission. As a result, the Company believes
that its current capital balances will be sufficient to meet its working
capital needs for at least the next two years. Additionally, while the Company
has retained certain liabilities, it has retained sufficient cash to meet them
should they become payable and due.

The Companys working capital was approximately $522,000 at September
30, 2008, including cash and cash equivalents of approximately $439,000. Cash
used by operating activities was $809,742 and cash used in investing activities
was $42,185 during the year ended September 30, 2008. This was offset by
proceeds from financing activities of $1,290,927.

Hydron Continuing
Operations

The
  Companys continuing operations include:1.
Its 50%
  investment in the Joint Venture2.
Its
  ownership and licensing of its patented intellectual property3.
Its majority
  ownership of the Partnership15

Investment in Brand
Builders Rx, LLC, a Delaware limited liability company (the Joint Venture)

The Company owns a 50% interest in the Joint Venture and under the
terms of the Joint Venture Agreement, will share in 50% of the Joint Venturer
net profits if earned. The Companys risk is limited to its original
investment.

Licensing of the
Companys Patented Intellectual Property

The Company continues to own its patented intellectual property (IP)
but has licensed its use according to the terms agreed to in the Joint Venture
Agreement. With the exception of the super-oxygenation technology the licensing
is royalty free to the Joint Venture. The Joint Venture is however responsible
to the Company for any royalties required to be paid by Hydron under the Valera
Agreement.

Majority ownership
of Hydron Royalty Partners Ltd., LLLP (the Partnership)

The Company will continue to serve as General Partner and own the
majority ownership percentage of the Partnership.

Liquidity

On October 3, 2007, the Company, closed on a private offering of
1,400,000 units (Units), comprised of one (1) share (Share) of its Common
Stock and one (1) warrant (Warrant) for the purchase of one (1) share of
Common Stock. The Company received gross proceeds of One Hundred Seventy Five
Thousand Dollars ($175,000) from the sale of Units in the Offering.

Among the individuals who purchased Units in the Offering is Ronald J.
Saul, a director of the Company who together with his spouse purchased 300,000
Units pursuant to two separate subscription agreements. Mr. Saul and his spouse
paid for 200,000 Units by the cancellation of certain indebtedness owed to them
by the Company evidenced by a promissory note in the principal amount of Twenty
Five Thousand Dollars ($25,000) and paid for 100,000 Units by payment in cash.

On October 30, 2007, the Company, closed on a private offering of
400,000 units (Units), comprised of one (1) share (Share) of its Common
Stock and one (1) warrant (Warrant) for the purchase of one (1) share of
Common Stock of the Company for each Unit purchased or a total of 400,000
Shares and 400,000 Warrants to purchase Shares. The Company received gross cash
proceeds of Fifty Thousand Dollars ($50,000) from the sale of Units in the
Offering.

Ronald J. Saul, a director of the Company, purchased the 400,000 Units
together with his spouse pursuant to a subscription agreement dated October 30,
2007.

On January 23, 2008, the Company, closed on a private offering of
600,000 units (Units), comprised of one (1) share (Share) of its Common
Stock and one (1) warrant (Warrant) for the purchase of one (1) share of
Common Stock. The Company received gross proceeds of Seventy Five Thousand
Dollars ($75,000) from the sale of Units in the Offering.

Among the individuals who purchased Units in the Offering is Ronald J.
Saul, a director of the Company who together with his spouse purchased 200,000
Units and Richard Banakus, the Chairman, interim president and a director of
the Company, who purchased 200,000 units pursuant to a subscription agreement.

16

The Company used the proceeds of the Offering to pay current
obligations of the Company, including payments made to its landlord for
outstanding rent.

On April 9, 2008, the Company borrowed Forty Thousand Dollars ($40,000)
(the Loan) from Richard Banakus, the Chairman, interim President and a
director of the Company (the Lender). In connection with the Loan, the
Company issued to the Lender a promissory note in the principal amount of Forty
Thousand Dollars (the Note) providing for the payment of principal and interest
at the rate of five percent (5%) per annum, in a balloon payment on the earlier
of (i) ninety (90) days from the date of April 9, 2008, or (ii) the date of the
closing of a transaction with net proceeds payable to the Company from any debt
or equity transaction.

In addition, in connection with the Loan, the Lender received a common
stock purchase warrant (the Warrant) entitling Mr. Banakus to purchase Fifty
Thousand (50,000) shares of Common Stock at an exercise price of Eight and
Four-Tenths of a Cent ($.084) per share for a five-year period. The Warrant
provides that in the event that the Company shall grant piggy back
registration rights to any other party to cause the Companys Common Stock or
any security exercisable or exchangeable for, or convertible into, shares of
Common Stock to be included in a registration statement filed by the Company
for sale by any selling shareholder or by the Company, the Company will grant
the holders of Warrant similar registration rights.

During the year ended September 30, 2008, the Company borrowed $40,000
from Hydron Royalty Partners Ltd., LLLP, a Florida limited liability
partnership (the Partnership); The Company is the general partner of the
Partnership which includes two directors of the Company and several significant
shareholders of the Company as limited partners. Under the terms of the
promissory note evidencing the loan, the partnership may, but is not obligated
to, lend up to an aggregate $40,000 in principal amount to the Company. Amounts
lent bear interest at 10% per annum. The outstanding principal and interest on
the note is payable on December 6, 2008.

On July 30, 2008, the Company, closed on a private offering (the
Offering) of thirteen thousand (13,000) of its Series A Preferred Shares. The
Company received aggregate gross proceeds of One Million Three Hundred Thousand
Dollars ($1,300,000) from the sale of the Series A Preferred Shares in the
Offering. After issuance of the Series A Preferred Shares sold in the Offering,
the Company has a total of 13,000 Series A Preferred Shares outstanding.

Among the individuals who purchased Series A Preferred Shares in the
Offering are (i) Richard Banakus, the Chairman, interim President and a
director of the Company, who purchased 5,270 shares pursuant to a subscription
agreement providing for payment by the cancellation of two promissory notes
representing obligations of the Company to Mr. Banakus in the original
principal amounts of $50,000 and $40,000 and the payment of $437,000 in cash;
(ii) Ronald J. Saul, a director of the Company who together with his spouse
purchased 1,500 shares pursuant to a subscription agreement providing for
payment by the cancellation of two promissory notes representing obligations of
the Company to Mr. Saul and his spouse in the original principal amounts of
$100,000 and $50,000; and (iii) Karen Gray, a director of the Company who
purchased 100 shares pursuant to a subscription agreement providing for payment
of $10,000 in cash.

17

Operating activities

Net cash used
for continuing operating activities for fiscal 2008 was $809,742 as compared to
$603,938 for fiscal 2007. Non-cash items totaling $554,217 contributing to the
net cash used in continuing operating activities for fiscal 2008 include


an adjustment of $699,192 to reconcile our net loss to net cash used
  in operating activities,
$21,156 representing the fair value of options and shares issued to
  our executive officers and directors, and employees,
$4,200 representing the value of the stock purchase warrants to
  certain note holders,
$36,824 of deferred financing costs,
$4,583 representing fair value of stock issued in payment for
  interest expense on notes payable,
$92,047 of depreciation and amortization, and
$8,318 of
  bad debt expense.Investing activities

Net cash used in investing activities for fiscal 2008 was $42,185,
which reflects purchases of fixed assets, as compared to $2,150 for fiscal 2007
for the purchase of fixed assets.

Financing activities

Net cash provided by financing activities was $1,290,927 for fiscal
2008 as compared to $596,810 for fiscal 2007. During fiscal 2008 we generated
cash from the sale of our securities, the exercise of options and a loan from
an executive officer and director which was offset by repayments of notes
payable and payments on capital leases; during fiscal 2007 we generated cash
from the sale of securities, the exercise of options and a loan from an
executive officer and director which was offset by payments on capital leases.

New Accounting
Pronouncements

In December 2007, the FASB issued SFAS No. 141R, BusinessCombinations, which replaces SFAS
No. 141. The statement retains the purchase method of accounting for
acquisitions, but requires a number of changes, including changes in the way
assets and liabilities are recognized in purchase accounting. It also changes
the recognition of assets acquired and liabilities assumed arising from
contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related
costs as incurred. SFAS No. 141R is effective for our c company beginning
December 15, 2008 and will apply prospectively to business combinations
completed on or after that date. Management believes that, for the foreseeable
future, this Statement will have no impact on our financial statements once
adopted.

In December 2007, the FASB issued SFAS
No. 160, NoncontrollingInterests
in Consolidated Financial Statements, an amendment of ARB No. 51,which
changes the accounting and reporting for minority interests. Minority interests
will be recharacterized as noncontrolling interests and will be reported as a
component of equity separate from the parents equity, and purchases or sales
of equity interests that do not result in a change in control will be accounted
for as equity transactions. In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement and, upon a loss of control, the interest sold, as
well as any interest retained, will be recorded at fair value with any gain or
loss recognized in earnings. SFAS No. 160 is effective for our company
effective December 15, 2008 and will apply prospectively, except for the
presentation and disclosure requirements, which will apply
retrospectively. Management believes that, for the foreseeable future,
this Statement will have no impact on our financial statements once
adopted.

18

The FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157),
defines fair value as used in numerous accounting pronouncements, establishes a
framework for measuring fair value and expands disclosure of fair value
measurements. In February 2008, the FASB issued FASB Staff Position, FSP FAS
157-2Effective Date of FASB Statement No. 157 (FSP 157-2), which delays the
effective date of SFAS 157 for one year for certain nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually).
Excluded from the scope of SFAS 157 are certain leasing transactions accounted
for under SFAS No. 13, Accounting for Leases. The exclusion does not apply to
fair value measurements of assets and liabilities recorded as a result of a
lease transaction but measured pursuant to other pronouncements within the
scope of SFAS 157. We have not yet determined whether we will adopt SFAS 157.

In March 2008, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133,which
requires additional disclosures about the objectives of the derivative instruments
and hedging activities, the method of accounting for such instruments under
SFAS No. 133 and its related interpretations, and a tabular disclosure of
the effects of such instruments and related hedged items on our financial
position, financial performance, and cash flows. SFAS No. 161 is effective
for our company beginning December 15, 2008. Management believes that, for the
foreseeable future, this Statement will have no impact on the financial
statements once adopted.

In April 2008, FASB Staff Position No. 142-3, Determination of the
Useful Life of Intangible Assets (FSP 142-3) was issued. This standard amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under FASB Statement No. 142, Goodwill and Other Intangible Assets. FSP 142-3
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early
adoption is prohibited. We have not determined the impact on our financial
statements of this accounting standard.

In May 2008, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 162, The Hierarchy of Generally Accepted Accounting
Principles. The new standard is intended to improve financial reporting by
identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with U.S. generally accepted accounting principles (GAAP) for
non-governmental entities. We are currently evaluating the effects, if any,
that SFAS No. 162 may have on our financial reporting.

Application of Critical Accounting Policies

The preparation of financial statements requires management to make
estimates and judgments that affect the reported amounts of assets,
liabilities, sales and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, management evaluates these estimates,
including those related to bad debts, inventories, investments, intangible
assets, income taxes, restructuring, and contingencies and litigation.
Management bases these estimates on historical experience and on various other
assumptions that management believes to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions
or conditions.

19

Management believes the following critical accounting policies are
significant in preparation of our financial statements.

Revenue
Recognition and Allowance for Sales Returns

The Company records product sales when persuasive evidence of an
arrangement exists, shipment has occurred, the price to the buyer is fixed or
determinable, and collectability is reasonably assured. Catalog sales are sold
on a cash basis with a 30-day guarantee. Returns have been less than $10,000
annually for the last five years. A provision is made at the time sales are
recognized for the estimated cost of product warranties. Private label sales
are sold on account and are collected in 30 to 45 days. If there is a
production or packaging problem, the Company would correct the problem and
replace the product sold. To minimize that possibility, the Company inspects
all production batches before they are packaged to ensure quality, efficacy,
and consistency.

Inventory
Valuation

Shifting sales from one item in our product line to another or minimum
production requirements may create a situation where inventory levels of
specific items may exceed the annual sales of that item. This can create
inventory levels in excess of net realizable value. Management regularly reviews
inventory quantities on hand and, where necessary, records provisions for
excess and obsolete inventory based on either estimated forecast of product
demand or historical usage of the product. If sales do not materialize as
planned or decline below historic levels, management increases the reserve for
excess (quantities in excess of one years sales) and obsolete inventory. This
would reduce earnings and cash flows.

Packaging changes are planned far in advance in order to limit the
impact of out-dated or obsolete components. Private label customers are
required to prepay the cost of packaging materials in order to take advantage
of volume discounts and protect the Company from any sudden packaging changes.

Share Based Payments

In December 2004, the Financial Accounting Standards Board (FASB)
issued SFAS No. 123(R), Share-Based Payment, which replaces SFAS No. 123 and
supersedes Accounting Principles Board (APB) Opinion No. 25. Under SFAS No.
123(R), companies are required to measure the compensation costs of share-based
compensation arrangements based on the grant-date fair value and recognize the
costs in the financial statements over the period during which employees are
required to provide services. Share-based compensation arrangements include stock
options, restricted share plans, performance-based awards, share appreciation
rights and employee share purchase plans. In March 2005 the SEC issued Staff
Accounting Bulletin No. 107, or SAB 107. SAB 107 expresses views of the staff
regarding the interaction between SFAS No. 123(R) and certain SEC rules and
regulations and provides the staffs views regarding the valuation of
share-based payment arrangements for public companies. SFAS No. 123(R) permits
public companies to adopt its requirements using one of two methods. On April
14, 2005, the SEC adopted a new rule amending the compliance dates for SFAS
123R. Companies may elect to apply this statement either prospectively, or on a
modified version of retrospective application under which financial statements
for prior periods are adjusted on a basis consistent with the pro forma
disclosures required for those periods under SFAS 123. Effective with our
fiscal 2006, we adopted the provisions of SFAS No. 123R and related
interpretations as provided by SAB 107 prospectively. As such, compensation
cost is measured on the date of grant as its fair value. Such compensation
amounts, if any, are amortized over the respective vesting periods of the
option grant.

20

Item 7.
Financial Statements and Supplementary Data.Our financial
statements are contained in pages F-1 through F-17, which appear at the end of
this annual report.

Item 8.
Changes in and Disagreements with Accountants on Accounting and
  Financial Disclosure.None.

Item 8a(T).
Controls and Procedures.Disclosure Controls and Procedures

Our Chairman of the Board and Interim President is responsible for
establishing and maintaining disclosure controls and procedures for us.
Disclosure controls and procedures are controls and procedures designed to
reasonably assure that information required to be disclosed in our reports
filed under the Securities Exchange Act of 1934, such as this report, is
recorded, processed, summarized and reported within the time periods prescribed
by SEC rules and regulations, and to reasonably assure that such information is
accumulated and communicated to our management, including our of the Board and
Interim President who also acts as our principal financial and principal
accounting officer, to allow timely decisions regarding required disclosure.

Our management does not expect that our disclosure controls or our
internal controls will prevent all error and fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. In addition, the
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within a company have been detected. These
inherent limitations include the realities that judgments in decision-making
can be faulty, and that breakdowns can occur because of simple error or
mistake. Additionally, controls can be circumvented by the individual acts of
some persons, by collusion of two or more people or by management override of the
control. The design of any systems of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Over time, controls may become inadequate because
of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of these inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and not be detected.

As required by Rule 13a-15 under the Securities Exchange Act of 1934,
as of September 30, 2008, the end of the period covered by this report, our
management concluded its evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures. As of the evaluation date,
our Chairman of the Board and Interim President who also serves as our
principal financial and accounting officer, concluded that we maintain
disclosure controls and procedures that are effective in providing reasonable
assurance that information required to be disclosed in our reports under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods prescribed by SEC rules and regulations, and that such
information is accumulated and communicated to our management to allow timely
decisions regarding required disclosure.

21

Managements Report on Internal Control over
Financial Reporting

Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule 13a-15(f) under
the Securities Exchange Act of 1934. Our management assessed the effectiveness
of our internal control over financial reporting as of September 30, 2008. In
making this assessment, our management used criteria issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) in Internal Control Over Financial Reporting 
Guidance for Smaller Public Companies.

Our management has concluded that, as of September 30, 2008 during our
assessment of the design and the effectiveness of internal control over
financial reporting as of September 30, 2008, management identified the
following material weaknesses:


Top management has not developed a clear statement of ethical value
  and set the standard of conduct for financial reporting;
There is no documentation that the board of directors monitored or
  provided oversight responsibility related to financial reporting and related
  internal controls and considered its effectiveness;
There are no formal written policies and procedures related to
  financial reporting;
There are no formal documentation that management specified financial
  reporting objectives to enable the identification of risks, including fraud
  risks;
The Company lacked the resources and personnel to implement proper
  segregation of duties or other risk mitigation system.A significant deficiency, is a deficiency or
a combination of deficiencies, in internal control over financial reporting
that is less severe than a material weakness, yet important enough to merit
attention by those responsible for oversight of the registrants financial
reporting. A material weakness may be a group of significant deficiencies
which, when considered together creates the potential for material financial
reporting misstatement.

Management believes that certain significant
deficiencies it has observed as of September 30, 2008, will no longer translate
into material weaknesses, based on its recent joint venture which occurred
October 1, 2008.

The Company intends to gradually improve its
internal controls over financial reporting to the extent that it can allocate
resources to such improvements. It intends to prioritize the design of its
internal controls over financial reporting starting with its control
environment and risk assessments and ending with control activities,
information and communication activities, and monitoring activities.

22

Auditor Attestation

This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting. Our
managements report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only managements report in this annual
report.

Changes in Internal Control over Financial
Reporting

There was no change in our internal control over financial reporting
identified in connection with our evaluation that occurred during our last
fiscal quarter (our fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.

Item 8b.
Other Information.None.

PART III

Item 9.
Directors, Executive Officers, Control Personsand Corporate
  Governance; Compliance with Section 16(a) and the Exchange Act.The following
individuals serve as our executive officers and members of our Board of
Directors:

Listed below
are the directors and executive officers of the Company as of September 30,
2008:

Name

PositionRichard
  Banakus

Director,
  Chairman of the Board, Interim PresidentKaren Gray

DirectorRonald J.
  Saul

DirectorDavid
  Pollock

Director,
  Chief Executive OfficerBusiness Experience

Richard Banakus, age 62, has served as Chairman, Interim President and
a director of the Company since June 1995 and as Interim President of the Company
since September 19, 1997. From April 1991 to the present, Mr. Banakus has been
a private investor with interests in a number of privately and publicly held
companies. From July 1988 through March 1991, he was managing partner of Banyan
Securities, Larkspur, California, a securities brokerage firm that he founded.

Karen Gray, age 50, has served as a director of the Company since
December 1997 and was a consultant to the Company on marketing and
communications matters from November 1996 to December 1999. Ms. Gray has over
17 years of management experience in marketing communications in various
capacities with various companies. From 1993 to November 1996, Ms. Gray served
as Vice President, Corporate Communications, of the Company. From June 1992 to
November 1993, Ms. Gray served as President of MarCom Associates, Inc., a
marketing communications company that she founded.

23

Ronald J. Saul, age 61, has served as a director of the company since
January 2003. From September 1992 to the present, Mr. Saul has been a financial
consultant. From October 1985 through August 1992, Mr. Saul was the Treasurer
and Vice President of National Intergroup, a multi company holding company.
From November 1970 to September 1985, Mr. Saul held various accounting and
financial positions with National Intergroup Inc. and its predecessor company,
National Steel Corporation.

David Pollock age 44, has served as a director of the Company and as
CEO of the Company from July 1, 2005 to November 11, 2008. On November 11,
2008, David Pollock notified the Companys board of directors of his decision
to resign as the Companys Chief Executive Officer and as a member of the board
of directors in order to avoid any potential conflicts of interest that may
occur as a result of Mr. Pollocks significant role in the Joint Venture. Mr.
Pollock was responsible for developing a number of innovative products,
including some of the early glycolic and alpha hydroxy acid products, the first
mass market Vitamin C line, one of the best selling acne systems in the mass
market, plus products for such brands as SkinCeuticals, Bliss, Shaklee, Ted
Gibson, Vogue International, DermaFresh, Keri Lotion, California Beauty, Desert
Essence and more.

Mr. Pollocks experience in formulating is augmented by his
product marketing background as the former Vice President of Product
Development for the Home Shopping Network and his senior management position
with the Fuller Brush company. Mr. Pollock has been a keynote speaker at
various national conferences, written a number of articles for various consumer
and trade publications, been a contributing writer to a text book on delivery
systems for chemists, currently serves on the Scientific Advisory Committee for
CTFA (Cosmetic Toiletries & Fragrance Association) and has served on the
board for FCPMA (Florida Cosmetic Pharmaceutical Manufacturers Association).

There are no family relationship between any of the executive officers
and directors. Each director is elected at our annual meeting of stockholders
and holds office until the next annual meeting of stockholders, or until his
successor is elected and qualified.

Director and Officer
Resignations

Subsequently on November 11, 2008, David Pollock notified the Companys
board of directors of his decision to resign as the Companys Chief Executive
Officer and as a member of the board of directors in order to avoid any
potential conflicts of interest that may occur as a result of Mr. Pollocks
significant role in the Joint Venture.

CORPORATE GOVERNANCE

Audit Committee

The Audit Committee is comprised of the entire Board of Directors, as
such reviewed and discussed the audited financial statements with management.
The audit committee has discussed with the independent auditors the matters
required to be discussed by the statement on Auditing Standards No. 61 and No.
100 as amended (AICPA, Professional Standards, vol. 1, AU section 380), as
adopted by the Public Company Accounting Oversight Board in Rule 3600T. The
audit committee has received the written disclosures and the letter from the
independent accountants required by Independence Standards Board Standard No. 1
(Independence Standards Board Standard No. 1, Independence Discussions with
Audit Committees), as adopted by the Public Company Accounting Oversight Board
in Rule 3600T, and has discussed with the independent accountant the
independent accountants independence.

24

Based on this
review and discussion, the Board of Directors recommended that the audited
financial statements be included in the Companys annual report on Form 10-KSB
for the fiscal year ended September 30, 2008 and filed and the Securities and
Exchange Commission.

Audit Committee
Financial Expert

The Companys
Board of Directors has determined that the Companys audit committee does have
a financial expert serving on the audit committee. Ronald Saul is the financial
expert serving on the audit committee.

Compliance
with Section 16(A) of the Securities Exchange Act of 1934

The Companys officers, directors and beneficial owners of more than
10% of any class of its equity securities registered pursuant to Section 12 of
the Securities Exchange Act of 1934 (Reporting Persons) are required under
the Act to file reports of ownership and changes in beneficial ownership of the
Companys equity securities with the Securities and Exchange Commission. Copies
of those reports must also be furnished to the Company. Based solely on a
review of the copies of reports furnished to the Company pursuant to the Act,
the Company believes that during the year ended September 30, 2008 all filing
requirements applicable to Reporting Persons were not complied with.

CODE OF ETHICS

As of the date of this report, the Company has not adopted a Code of
Ethics applicable to its principal executive officer, principal financial
officer, principal accounting officer or controller or persons performing
similar functions.

Although the Company recognizes the desirability of a Code of Ethics,
it does not believe that the development of a comprehensive Code is necessary
or a desirable use of the Companys limited financial resources, particularly
given the simple administrative structure and limited number of management
personnel of the Company. The Company intends to develop and adopt a suitable
Code of Ethics when its financial condition and management structure warrants.

Item 10.
Executive Compensation.The following table summarizes all compensation recorded by us in each
of the last two completed fiscal years for our principal executive officer,
each other executive officer serving as such whose annual compensation exceeded
$100,000 and up to two additional individuals for whom disclosure would have
been made in this table but for the fact that the individual was not serving as
an executive officer of our company at September 30, 2008. The information
provided for the 2007 period represents the compensation paid during the
transition period of the nine months ended September 30, 2007. The value
attributable to any option awards is computed in accordance with FAS 123R.

25

Name and Principal Position

Year

Salary

Stock Option 
  Award (1)

All Other 
  Compensation

TotalDavid
  Pollock


2008

$
118,230


-


-

$
118,230Chief
  Executive Officer (2)


2007

$
79,540


-


-

$
79,540(1)
Based upon
  the aggregate grant date fair value calculation in accordance with the
  Financial Accounting Standards Board (FASB) Statement of Accounting
  Standard (FAS) No. 123R, Share Based Payments. Our policy and assumptions
  made in valuation of share-based payments are contained in Note 12 to our
  September 30, 2008 financial statements.(2)
Mr. Pollock
  serves as our principal executive officer and has held such position since
  July 1, 2005.Employment Agreements

The Company
had an employment agreement with David Pollock; Chief Executive Officer of the
Company, The employment agreement expired on June 30, 2008 and provided for an
annual salary of $106,000.

Option Grants

During 2008,
pursuant to the Companys 2003 Stock Plan, the Named Executive Officers were
granted options to purchase shares of the common stock of the Company
exercisable at the fair market value on the date of grant. During 2008, no
Named Executive Officer received a grant of options under the 2003 Option plan.

Outstanding Equity
Awards at Fiscal Year-End

The following
table sets forth certain information concerning outstanding stock awards held
by the Named Executive Officers as of September 30, 2008.

Name

Number of Securities 
  Underlying Options (#) 
  Exercisable

Number of Securities 
  Underlying Options (#) 
  Unexercisable

Option 
  Price

Option Expiration 
  DateDavid
  Pollock


-


400,000 (1
)
$
.281


September 5, 2010(1) Based on
the Company reaching outlined performance goals. 200,000 shares vest automatically
when the Company reaches $3,000,000 in revenues within a period of no more than
four consecutive quarters, and 200,000 shares vest when the Company generates a
pre-tax earnings goal of $1,000,000 in a period of no more than four
consecutive quarters.

26

2003 Stock Plan

This 2003 Plan is designed to consolidate and replace two Stock Option
Plans, which have expired; the 1993 Stock Option Plan and the 1997 Non-Employee
Director Stock Option Plan. The purpose of the 2003 Plan is to assist the
Company in attracting, retaining, and motivating key employees, officers,
directors, and consultants by offering selected individuals an opportunity to
acquire a proprietary interest in the success of the Company.

Compliance with Section 16(a) of the Exchange
Act

Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to us under Rule 16a-3(d) of the Securities Exchange Act during
fiscal 2008 and Forms 5 and amendments thereto furnished to us with respect to
fiscal 2008, as well as any written representation from a reporting person that
no Form 5 is required, we are aware that some officer, director or 10% or
greater stockholder failed to file on a timely basis, as disclosed in the
aforementioned Forms, reports required by Section 16(a) of the Securities
Exchange Act during fiscal 2008, however these forms have subsequently been
filed.

Director Compensation

The
following table sets forth compensation paid, earned or accrued for service as
a director in our fiscal year ended September 30, 2008.

Name

Fees Earned or Paid in Cash

Option Awards (1)

TotalRichard
  Banakus

$
15,492

$
1,500

$
17,092Karen Gray

$
5,000

$
1,500

$
6,500Ronald J.
  Saul

$
5,000

$
1,875

$
6,875(1)
Based upon the aggregate grant date fair value calculation in
  accordance with FAS No. 123R, Share Based Payments. Our policy and
  assumptions made in valuation of share-based payments are contained in Note
  12 to our September 30, 2008 financial statements.Fees

Employees of the Company who also serve as directors are not entitled
to any additional compensation for such service, except for Mr. Richard
Banakus. Because of his status as Interim President, Mr. Banakus is treated as
a non-employee director. The Company does not have a written employment
agreement with Mr. Banakus.

Non-employee directors, including for this purpose Mr. Banakus, each
receive an annual fee of $5,000 for serving on the Board of Directors. Such
fees have not been paid but are accrued quarterly. As of September 30, 2008,
unpaid directors fees total approximately $138,520.

27

Option Grants

In addition,
pursuant to the terms of the Companys 2003 Stock Plan, in 2007, the Company
granted each director options to purchase 20,000 shares of common stock having
an exercise price equal to the fair market value of the Companys common stock
on the date of grant, and awarded additional options for the purchase of 5,000
shares of common stock having an exercise price equal to the fair market value
of the Companys common stock on the date of grant to directors serving on a
committee of the Board of Directors.

Item 11.
Security Ownership of Certain Beneficial Owners and Management and
  Related Stockholder MattersAt September
30, 2008 we had 19,621,176 shares of common stock issued and outstanding. The
following table sets forth information known to us as of September 30, 2008
relating to the beneficial ownership of shares of our common stock by:

▪
each person
  who is known by us to be the beneficial owner of more than 5% of our
  outstanding common stock;▪
each
  director;▪
each named
  executive officer; and▪
all named
  executive officers and directors as a group.Unless
otherwise indicated, the business address of each person listed is in care of
4400 34th Street North, Suite F, St Petersburg, Florida 33714. The
percentages in the table have been calculated on the basis of treating as
outstanding for a particular person, all shares of our common stock outstanding
on that date and all shares of our common stock issuable to that holder in the
event of exercise of outstanding options, warrants, rights or conversion
privileges owned by that person at that date which are exercisable within 60
days of that date. Except as otherwise indicated, the persons listed below have
sole voting and investment power with respect to all shares of our common stock
owned by them, except to the extent that power may be shared with a spouse.

Name and Address of
  Beneficial Owner

Amount and Nature of
  Beneficial Ownership

Approximate
  Percent of ClassRichard Banakus


3,789,300
1


18.31
%Karen Gray


124,000
2


1.0
%Ronald J. Saul


7,138,536
6


31.70
%David Pollock


1,400,000
3


6.99
%All directors and executive officers as a
  group (4 persons)


12,451,836
9


51.68
%Item 12.
Certain Relationships and Related Transactions, and Director
  Independence.On October 3,
2007, the Company, closed on a private offering (the Offering) of 1,400,000
units (Units), Among the individuals who purchased Units in the Offering is
Ronald J. Saul, a director of the Company who together with his spouse
purchased 300,000 Units pursuant to two separate subscription agreements.

1
Consists of 2,714,300 shares held directly and 1,075,000 shares issuable upon
exercise of options and warrants.

2
Consists of 24,000 shares held directly and 100,000 shares issuable upon
exercise of options.

6 Consists
of 4,238,536 shares held directly and 2,900,000 shares issuable upon exercise
of options.

7 Consists of 1,000,000 shares
held directly and 400,000 shares issuable upon exercise of options and
warrants.

9 Consists
of 7,976,836 shares held directly and 4,475,000 shares issuable upon exercise
of options.

28

On October 30,
2007, the Company, closed on a private offering of 400,000 units (Units),
Ronald J. Saul, a director of the Company, purchased the 400,000 Units together
with his spouse pursuant to a subscription agreement dated October 30, 2007.

On January 23,
2008, the Company, closed on a private offering of 600,000 units (Units),
comprised of one (1) share (Share) of its Common Stock and one (1) warrant
(Warrant) for the purchase of one (1) share of Common Stock. The Company
received gross proceeds of Seventy Five Thousand Dollars ($75,000) from the
sale of Units in the Offering.

Among the
individuals who purchased Units in the Offering is Ronald J. Saul, a director
of the Company who together with his spouse purchased 200,000 Units and Richard
Banakus, the Chairman, interim president and a director of the Company, who
purchased 200,000 units pursuant to a subscription agreement.

On April 9,
2008, the Company borrowed Forty Thousand Dollars ($40,000) (the Loan) from
Richard Banakus, the Chairman, interim President and a director of the Company
(the Lender). In connection with the Loan, the Company issued to the Lender a
promissory note in the principal amount of Forty Thousand Dollars (the Note)
providing for the payment of principal and interest at the rate of five percent
(5%) per annum, in a balloon payment on the earlier of (i) ninety (90) days
from the date of April 9, 2008, or (ii) the date of the closing of a
transaction with net proceeds payable to the Company from any debt or equity
transaction.

On July 30,
2008, the Company, closed on a private offering (the Offering) of thirteen
thousand (13,000) of its Series A Preferred Shares. The Company received
aggregate gross proceeds of One Million Three Hundred Thousand Dollars
($1,300,000) from the sale of the Series A Preferred Shares in the Offering.
After issuance of the Series A Preferred Shares sold in the Offering, the
Company has a total of 13,000 Series A Preferred Shares outstanding.

Among the
individuals who purchased Series A Preferred Shares in the Offering are (i)
Richard Banakus, the Chairman, interim President and a director of the Company,
who purchased 5,270 shares pursuant to a subscription agreement providing for
payment by the cancellation of two promissory notes representing obligations of
the Company to Mr. Banakus in the original principal amounts of $50,000 and
$40,000 and the payment of $437,000 in cash; (ii) Ronald J. Saul, a director of
the Company who together with his spouse purchased 1,500 shares pursuant to a
subscription agreement providing for payment by the cancellation of two
promissory notes representing obligations of the Company to Mr. Saul and his
spouse in the original principal amounts of $100,000 and $50,000; and (iii)
Karen Gray, a director of the Company who purchased 100 shares pursuant to a
subscription agreement providing for payment of $10,000 in cash.

Item 13.
ExhibitsThe following
documents are filed as a part of this report or are incorporated by reference
to previous filings, if so indicated:

29

3.1
Restated
  Certificate of Incorporation of Dento-Med Industries, Inc. (Dento-Med), as
  filed with the Secretary of State of New York on March 4, 1981. (1)3.2
Certificate
  of Amendment of the Certificate of Incorporation of Dento-Med as filed with
  the Secretary of State of New York on September 7, 1984. (2)3.3
By-laws of
  the Company, as amended March 17, 1988. (3)3.4
Certificate
  of Change of Dento-Med as filed with the Secretary of State of New York on
  July 14, 1988. (2)3.5
Certificate
  of Amendment of the Restated Certificate of Incorporation of Dento-Med, as
  filed with the Secretary of State of New York on November 14, 1988. (4)3.6
Certificate
  of Amendment of the Restated Certificate of Incorporation of Dento-Med, as
  filed with the Secretary of State of New York on July 30, 1993. (5)3.7
Certificate
  of Amendment of the Restated Certificate of Incorporation of Hydron
  Technologies, Inc., as filed with the Secretary of State of New York on April
  10, 2002. (2)3.8
Certificate
  of Amendment of the Certificate of Incorporation dated July 30, 2008, as
  filed with the Secretary of State of the State of New York. (24)4.1
Non-Qualified
  Stock Option Plan. (6)4.2
Registration
  Rights Agreement dated July 11, 2002, by and between Hydron Technologies,
  Inc. and Life International Products, Inc. (2)4.3
Warrant
  Agreement dated November 14, 2003 between Hydron Technologies, Inc. and the
  parties named therein. (2)5.03
Amendments to Articles of Incorporation or Bylaws; Change in Fiscal
  Year. (18)7.1
Letter of
  Sherb & Co LLP dated May 25, 2007 addressed to the United States
  Securities Exchange Commission. (15)10.1
Subscription
  Agreement dated November 22, 2002 between Hydron Technologies, Inc. and the
  subscribers named therein. (2)10.2
Subscription
  Agreement dated September 31, 2003 between Hydron Technologies, Inc. and the
  subscribers named therein. (2)10.3
Agreement
  dated July 11, 2002 between Hydron Technologies, Inc. and Life International
  Products, Inc. (2)10.4
1997
  Nonemployee Director Stock Option Plan. (7)10.5
Bridge Loan
  Term Sheet for Interim Loans between Hydron Technologies, Inc and Members of
  the Board of Directors. (2)10.6
2003 Stock
  Plan (8)30

10.7
Note dated
  June 14, 2005 in the principal amount of $50,000 payable to Richard Banakus
  (9)10.8
Note dated
  June 14, 2005 in the principal amount of $50,000 payable to Ronald J. Saul
  and Antonette G. Saul, jointly (9)10.9
Note dated
  June 14, 2005 in the principal amount of $50,000 payable to Regis Synan (9)10.10
Common Stock
  Purchase Warrant dated June 14, 2005 in favor of Richard Banakus (9)10.11
Common Stock
  Purchase Warrant dated June 14, 2005 in favor of Ronald J. Saul and Antonette
  G. Saul, jointly (9)10.12
Common Stock
  Purchase Warrant dated June 14, 2005 in favor of Regis Synan (9)10.13
Purchase and
  Sale Agreement by and among Clinical Results, Inc., David Pollock and Douglas
  Reitz and Hydron Technologies, Inc., dated July 1, 2005 (10)10.14
Employment
  Agreement for David Pollock (10)10.15
Employment
  Agreement for Richard Douglas Reitz (10)10.16
Form of
  Assignment (11)10.17
Subscription
  Agreement dated January 31, 2007 between Hydron Technologies, Inc. and
  Richard Banakus (13)10.18
Subscription
  Agreement dated January 31, 2007 between Hydron Technologies, Inc. and Ronald
  J. Saul and Antonette G. Saul, jointly (13)10.19
Subscription
  Agreement dated February 5, 2007 between Hydron Technologies, Inc. and Ronald
  J. Saul and Antonette G. Saul, jointly (13)10.20
Common stock
  Purchase Warrant dated February 1, 2007 in favor of Richard Banakus (13)10.21
Common stock
  Purchase Warrant dated February 1, 2007 in favor of Ronald J. Saul and
  Antonette G. Saul, jointly (13)10.22
Common stock
  Purchase Warrant dated February 5, 2007 in favor of Ronald J. Saul and
  Antonette G. Saul, jointly (13)10.23
Subscription
  Agreement dated March 21, 2007 between Hydron Technologies, Inc. and Ronald
  J. Saul and Antonette G. Saul, jointly (14)31

10.24
Common stock
  Purchase Warrant dated March 21, 2007 in favor of Ronald J. Saul and
  Antonette G. Saul, jointly (14)10.25
Subscription
  Agreement dated July 18, 2007 between Hydron Technologies, Inc. and Ronald J.
  Saul and Antonette G. Saul, jointly (16)10.26
Common stock
  Purchase Warrant dated July 18, 2007 in favor of Ronald J. Saul and Antonette
  G. Saul, jointly (16)10.27
Promissory
  note dated August 14, 2007 in the principal amount of twenty five thousand
  dollars ($25,000) payable to Ronald J Saul and Antonette G. Saul, jointly.
  (17)10.28
Subscription
  Agreement dated October 3, 2007 between Hydron Technologies, Inc. and Ronald
  J. Saul and Antonette G. Saul, jointly for the purchase of 200,000 units paid
  by the cancellation of $25,000 promissory note.(19)10.29
Common stock
  Purchase Warrant dated October 3, 2007 in favor of Ronald J. Saul and
  Antonette G. Saul, jointly (19)10.30
Subscription
  Agreement dated October 3, 2007 between Hydron Technologies, Inc. and Ronald
  J. Saul and Antonette G. Saul, jointly for the purchase of 100,000 units paid
  in cash.(19)10.31
Common stock
  Purchase Warrant dated October 3, 2007 in favor of Ronald J. Saul and
  Antonette G. Saul, jointly (19)10.32
Subscription
  Agreement dated October 30, 2007 between Hydron Technologies, Inc. and Ronald
  J. Saul and Antonette G. Saul, jointly for the purchase of 400,000 units.(20)10.33
Common stock
  Purchase Warrant dated January 23, 2008 in favor of Ronald J. Saul and
  Antonette G. Saul, jointly (21)10.34
Subscription
  Agreement dated January 23, 2008 between Hydron Technologies, Inc. and Ronald
  J. Saul and Antonette G. Saul, jointly for the purchase of 200,000 units.(21)10.35
Common stock
  Purchase Warrant dated January 23, 2008 in favor of Richard Banakus (21)10.36
Subscription
  Agreement dated January 23, 2008 between Hydron Technologies, Inc. and
  Richard Banakus, for the purchase of 200,000 units.(21)10.37
Common stock
  Purchase Warrant dated October 30, 2007 in favor of Ronald J. Saul and
  Antonette G. Saul, jointly (20)10.38
Promissory
  note Dated April 9, 2008 between Hydron Technologies, Inc. and Richard
  Banakus for the principal amount of forty thousand dollars ($40,000). (22)32

10.39
Subscription
  Agreement dated April 9, 2008 between Hydron Technologies, Inc. and Richard
  Banakus for the purchase of 1 unit. (22)10.40
Common stock
  Purchase Warrant dated April 9, 2008 in favor of Richard Banakus (22)10.41
OTCC
  Delinquency Notification dated May 21, 2008. (23)10.42
Promissory note
  Dated June 6, 2008 between Hydron Technologies, Inc. and Hydron Royalty
  Partners Ltd, LLLP for the principal amount of forty thousand dollars
  ($40,000).10.43
Subscription
  Agreement between Hydron Technologies and Richard Banakus for the purchase of
  5,270 Series A Preferred Shares [paid in cash and cancellation of promissory
  notes of the Company in the original principal amounts of $50,000 and
  $40,000]. (24)10.44
Subscription
  Agreement between Hydron Technologies and Ronald J. Saul and Antonette G.
  Saul, jointly for the purchase of 1,500 Series A Preferred Shares [paid in
  cash and cancellation of promissory notes in the original principal amounts
  of $100,000 and $50,000]. (24)10.45
Subscription
  Agreement dated between Hydron Technologies and Karen Gray for the purchase
  of 100 Series A Preferred Shares (paid in cash) (24)10.46
Subscription
  Agreement dated January 31, 2007 between Hydron Technologies, Inc. and
  Richard Banakus10.47
Subscription
  Agreement dated January 31, 2007 between Hydron Technologies and Ronald J.
  Saul and Antonette G. Saul, jointly10.48
Subscription
  Agreement dated February 5, 2007 between Hydron Technologies and Ronald J.
  Saul and Antonette G. Saul, jointly10.49
Common Stock
  Purchase Warrant dated February 1, 2007 in favor of Richard Banakus10.50
Common Stock
  Purchase Warrant dated February 1, 2007 in favor of Ronald J. Saul and
  Antonette G. Saul, jointly10.51
Common Stock
  Purchase Warrant dated February 5, 2007 in favor of Ronald J. Saul and Antonette
  G. Saul, jointly16.
Letter from
  Daszkal Bolton LLP dated December 4, 2006 to the Securities and Exchange
  Commission (12)23.2
Consent of
  Independent Registered Public Accounting Firm - Sherb & Co. LLP31.1
Certification
  of Chief Executive Officer, Principal Financial and Accounting Officer
  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and Item 307 of
  Regulation S-K (filed herewith)32.1
Certification
  of Chief Executive Officer, Principal Financial and Accounting Officer
  Pursuant to 18 U.S.C., Section 1350, as Adopted Pursuant to Section 906 of
  the Sarbanes-Oxley Act of 2002 (filed herewith)33

99.
Press
  Release dated July 6, 2005 incorporated by reference to Form 8-K filed on
  July 8, 2005.(1)
Incorporated
  by reference to the Companys report on Form 10-K for the year ended December
  31, 1985.(2)
Incorporated
  by reference to the Companys report on Form S-3 filed February 11, 2004.(3)
Incorporated
  by reference to the Companys report on Form 10-K for the year ended December
  31, 1987.(4)
Incorporated
  by reference to the Companys report on Form 10-K for the year ended December
  31, 1988.(5)
Incorporated
  by reference to the Companys report on Form 10-K for the year ended December
  31, 1993.(6)
Incorporated
  by reference to the Companys report on Form 10-K for the year ended December
  31, 1986.(7)
Incorporated
  by reference to the Companys Definitive Proxy Statement on Schedule 14A for
  the year ended December 31, 1996.(8)
Incorporated
  by reference to the Companys Definitive Proxy Statement for the year ended
  December 31, 2003.(9)
Incorporated
  by reference to Form 8-K filed June 20, 2005(10)
Incorporated
  by reference to Form 8-K filed July 8, 2005(11)
Incorporated
  by reference to Form 8-K filed November 2, 2005(12)
Incorporated
  by reference to Form 8-K filed December 5, 2006(13)
Incorporated
  by reference to Form 8-K filed February 7, 2007(14)
Incorporated
  by reference to Form 8-K filed March 21, 2007(15)
Incorporated
  by reference to Form 8-K filed May 20, 2007(16)
Incorporated
  by reference to Form 8-K filed July 18, 2007(17)
Incorporated
  by reference to Form 8-K filed August 14, 2007(18)
Incorporated
  by reference to Form 8-K filed September 20, 2007(19)
Incorporated
  by reference to Form 8-K filed October 3, 2007(20)
Incorporated
  by reference to Form 8-K filed October 30, 200734

(21)
Incorporated
  by reference to Form 8-K filed January 23, 2008(22)
Incorporated
  by reference to Form 8-K filed April 15, 2008(23)
Incorporated
  by reference to Form 8-K filed May 3, 2008(24)
Incorporated
  by reference to Form 8-K filed August 6, 2008(25)
Incorporated
  by reference to Form 8-K filed November 18, 2008Item 14.
Principal Accountant Fees and Services.Sherb &
Co., LLP served as our independent registered public accounting firm for 2008
and 2007. The following table shows the fees that were billed for the audit and
other services provided by such firm for 2008 and 2007.

2008

2007Audit Fees

$
47,500

$
42,000Audit-Related
  Fees


0


0Tax Fees


11,000


5,430All Other
  Fees


0


0Total

$
58,500

$
47,430Audit Fees This
category includes the audit of our annual financial statements, review of
financial statements included in our Form 10-QSB Quarterly Reports and services
that are normally provided by the independent auditors in connection with
engagements for those fiscal years. This category also includes advice on audit
and accounting matters that arose during, or as a result of, the audit or the
review of interim financial statements.

Audit-Related Fees
This category consists of assurance and related services by the independent
auditors that are reasonably related to the performance of the audit or review
of our financial statements and are not reported above under Audit Fees. The
services for the fees disclosed under this category include consultation
regarding our correspondence with the SEC and other accounting consulting.

Tax Fees This
category consists of professional services rendered by our independent auditors
for tax compliance and tax advice. The services for the fees disclosed under
this category include tax return preparation and technical tax advice.

All Other Fees
This category consists of fees for other miscellaneous items.

Our Board of
Directors has adopted a procedure for pre-approval of all fees charged by our
independent auditors. Under the procedure, the Board approves the engagement
letter with respect to audit, tax and review services. Other fees are subject
to pre-approval by the Board, or, in the period between meetings, by a
designated member of Board. Any such approval by the designated member is
disclosed to the entire Board at the next meeting. The audit and tax fees paid
to the auditors with respect to 2008 were pre-approved by the entire Board of
Directors.

35

PART IV

SIGNATURES

Pursuant to
the requirements 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.

HYDRON TECHNOLOGIES, INC./s/: Richard
  BanakusRichard
  BanakusChairman of
  the Board, Interim PresidentPrincipal
  Financial and Accounting OfficerDated:
  January 12, 200936

REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM

The Audit
Committee
Hydron Technologies, Inc.

We
have audited the accompanying consolidated balance sheets of Hydron
Technologies, Inc. as of September 30, 2008 and 2007 and the related
consolidated statements of operations, changes in shareholders equity (deficit)
and cash flows for the for the year ended September 30, 2008 and the nine
months ended September 30, 2007. These consolidated financial statements are
the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purposes
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 consolidated financial statements, assessing the accounting
principles used, and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hydron
Technologies, Inc. as of September 30, 2008, and the results of their
operations and their cash flows for the year ended September 30, 2008 and the
nine months ended September 30, 2007 in conformity with accounting principles
generally accepted in the United States of America.

The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. The Company has experienced losses
from operations in 2008 and 2007. These matters raises substantial doubt about
the Companys ability to continue as a going concern. Managements plans in
regards to this matter is discussed in Note 14. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

/s/ Sherb
  & Co., LLPBoca Raton,
  Florida
Certified
  Public AccountantsJanuary 12,
  2009

HYDRON TECHNOLOGIES, INC.
Consolidated Balance Sheet
September 30, 2008 and 2007

2008

2007ASSETSCurrent assetsCash

$
439,000

$
Trade accounts receivable, net


96,896


31,303Inventories


457,601


342,672Prepaid expenses and other current assets


19,737


3,054Total current assets


1,013,234


377,029Property and equipment, net


108,036


108,707Deferred product costs, net


93,977


111,538Intangible assets, net


128,359


159,989Restricted cash


7,823


68,853Deposits


5,699


29,652Total assets

$
1,357,128

$
855,768LIABILITIES AND SHAREHOLDERS EQUITY
(DEFICIT)Current liabilitiesOverdraft liability

$


$
15,287Accounts payable


93,718


231,057Loans payable, net


21,651


243,293Royalties payable


5,069


12,275Deferred revenues


65,247


79,961Accrued liabilities


305,235


297,494Current portion of obligation under capital
  leases





29,233Total current liabilities


490,920


908,600Long term liabilitiesObligation under capital lease payable





2,053Minority interest in consolidated
  partnership


185,653


207,807Shareholders equity (deficit)Preferred stock - $.01 par value 5,000,000
  shares authorized; no shares issued or outstanding





Preferred stock Series A - $100 par value
  15,000 shares authorized; 13,000 shares, issued or outstanding


1,300,000


Common stock - $.01 par value 30,000,000 shares
  authorized; 19,621,176 (2008) and 17,134,668 (2007) shares, issued and
  outstanding


196,211


171,346Additional paid-in capital


22,164,254


21,846,680Accumulated deficit


(22,972,094
)

(22,272,902
)Treasury stock, at cost 10,000 shares


(7,816
)

(7,816
)Total Shareholders equity (deficit)


680,555


(262,692
)Total liabilities and shareholders equity
  (deficit)

$
1,357,128

$
855,768See accompanying notes to consolidated
financial statements.

F-1

HYDRON TECHNOLOGIES, INC.
Consolidated Statements of Operations

Twelve Months ended September 30

Nine Months ended September 302008

2007

2007(Audited)

(Unaudited)

(Audited)Net sales

$
1,086,298

$
1,179,439

$
885,911Cost of sales


576,269


505,520


326,394Gross profit


510,029


673,919


559,517ExpensesRoyalty expense


10,770


5,168


Research and development


2,161


4,154


3,721Selling, general & administration


1,060,740


1,262,392


963,464Depreciation & amortization


92,047


99,180


72,017Total expenses


1,165,718


1,370,894


1,039,202Operating loss


(655,689
)

(696,975
)

(479,685
)Interest (expense), net of interest income of $1,560 and $1,320 and
  $880


(65,656
)

(69,096
)

(55,303
)Loss before income taxes and minority
interest


(721,345
)

(766,071
)

(534,988
)Income taxes expense








Minority interest in subsidiary


22,153


20,952


13,906Net loss

$
(699,192
)
$
(745,119
)
$
(521,082
)Basic and diluted loss per shareNet loss per common share

$
(0.04
)
$
(0.05
)
$
(0.03
)Weighted average common shares outstanding basic and
diluted


19,378,871


15,021,469


15,971,283See accompanying notes to consolidated financial statements.

F-2

HYDRON TECHNOLOGIES, INC.Consolidated
Statements of Changes in Shareholders Equity (Deficit)

Common Stock

Preferred Stock

AdditionalPaid-in

Accumulated

TreasuryStock

TotalShares

Amount

Shares

Amount

Capital

Deficit

(at cost)

EquityBalance at December 31, 2006


12,239,736

$
122,397




$


$
21,276,269

$
(21,751,820
)
$
(7,816
)
$
(360,970
)Exercise of stock options


625,000


6,250








60,538








66,788Issuance of common shares for payment of interest
on loan payable


161,108


1,611








29,965








31,576Warrants issued in connection with loan
payable














64,443








64,443Issuance of common shares for settlement of account
payable


58,824


588








9,412








10,000Compensation expense from stock option
awards














31,553








31,553Issuance of common shares for cash


4,050,000


40,500








374,500








415,000Net loss

















(521,082
)




(521,082
)Balance at September 30, 2007


17,134,668


171,346








21,846,680


(22,272,902
)

(7,816
)

(262,692
)Exercise of stock options


62,500


625








11,875








12,500Issuance of common shares in lieu of interest on
loan payable


24,008


240








4,343








4,583Warrants issued in connection with loan
payable














4,200








4,200Compensation expense from stock option
awards














21,156








21,156Issuance of common shares for private
offering


2,200,000


22,000








253,000








275,000Issuance of common shares in conversion of note
payable


200,000


2,000








23,000








25,000Issuance of preferred shares for private
offering








10,100


1,010,000











1,010,000Issuance of preferred shares for conversion of
notes payable








2,900


290,000











290,000Net loss

















(699,192
)




(699,192
)Balance at September 30, 2008


19,621,176

$
196,211


13,000

$
1,300,000

$
22,164,254

$
(22,972,094
)
$
(7,816
)
$
680,555See accompanying notes to consolidated financial
statements.

F-3

HYDRON TECHNOLOGIES, INC.Consolidated Statements of Cash Flows

Twelve Months ended September 30

Nine Months ended September 302008

2007

2007(Audited)

(Unaudited)

(Audited)OPERATING ACTIVITIESNet loss

$
(699,192
)
$
(745,119
)
$
(521,082
)Adjustments to reconcile net loss to net cash used
in operating
  activitiesMinority interest


(22,153
)

(20,952
)

(13,906
)Depreciation and amortization


92,047


99,180


72,017Compensation expense from stock option
awards


21,156


69,581


31,553Warrants issued from loans payable


4,200


64,443


64,443Common stock issued in settlement





10,000


10,000Deferred financing costs


36,824


(30,995
)

(34,562
)Common stock issued for interest expense


4,583


31,576


31,576Bad debt expense


8,318


10,008


10,008Change in operating assets and
liabilitiesRestricted cash


61,030


25,003


21,302Trade accounts receivable


(73,911
)

1,342


6,365Inventories


(114,929
)

54,341


(73,419
)Prepaid expenses and other current
assets


(16,683
)

3,970


1,245Deposits


23,953


(6,623
)

(400
)Accounts payable


(137,340
)

(145,990
)

(158,170
)Royalties payable


(7,206
)

(14,807
)

(15,833
)Deferred revenues


(14,714
)

(34,187
)

(50,071
)Accrued interest


16,534


(3,577
)

(10,003
)Accrued liabilities


7,741


28,868


21,361Net cash used in operating activities


(809,742
)

(603,938
)

(607,576
)INVESTING ACTIVITIESPurchase of fixed assets


(42,185
)

(2,150
)

(2,150
)Net cash used in investing activities


(42,185
)

(2,150
)

(2,150
)FINANCING ACTIVITIESCash overdraft


(15,287
)

15,287


15,287Proceeds from issuance of Common Stock


275,000


415,000


415,000Proceeds from issuance of Preferred Stock Series
A


1,010,000Proceed from loans payable


40,000


125,000


125,000Payments on capital leases


(31,286
)

(25,265
)

(19,289
)Proceeds from exercise of stock options


12,500


66,788


66,788Net cash provided by financing activities


1,290,927


596,810


602,786Net increase (decrease) in cash and cash
equivalents


439,000


(9,278
)

(6,940
)Cash and cash equivalents at beginning of period





9,278


6,940Cash and cash equivalents at end of period

$
439,000

$


$
SUPPLEMENTAL CASH FLOW INFORMATIONStock issued to pay accrued interest

$
4,583

$
31,576

$
31,576Warrants issued in connection with private
offering


300,000





415,000Equipment received for payment of accounts
receivable

$


$
15,500

$
15,500Preferred stock issued for cancellation of notes
payable

$
290,000





Common stock issued for cancellation of note
payable

$
25,000





Cash paid for interest

$
349





See accompanying notes to consolidated financial
statements.

F-4

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

Note 1. Description of Business and Summary
of Significant Accounting Policies

Organization
of Business

Through
September 30, 2008, Hydron Technologies, Inc. a New York Corporation (the
Company) marketed a broad range of cosmetic and oral health care products,
many using a moisture-attracting ingredient (the Hydron® polymer)
and a topical delivery system for active ingredients including pharmaceuticals.
The Company holds U.S. and international patents on, what management believes
is, the only known cosmetically acceptable method to suspend the Hydron polymer
in a stable emulsion for use in personal care/cosmetic products. The Company
also developed other personal care/cosmetic products for consumers using its
patented technology.

The Company
has also developed a super-oxygenation technology for which it was granted a
patent in November 2003. This patent covers the process of applying a liquid,
containing pure oxygen micro-bubbles to the surface of the skin such that the
oxygen penetrates the skin and oxygenates the underlying tissue. On January 10,
2005, the Company attended a Pre-Investigational Device Exemption meeting with
the FDA in the belief that a clear pathway for safety and clinical research
requirements could be determined at that time; however, a defined methodology
could not be agreed upon. As a result of that meeting, and in consideration of
the Companys limited working capital, management decided to refocus its
efforts on non-medical technologies. The Company continues to believe that its
tissue oxygenation technology has significant potential.

On November
11, 2008, the Company entered into certain agreements with Brand Builders
International, LLC, a Delaware limited liability company (Harezi) effective
October 1, 2008, relating to a joint venture between the Company and Harezi to
be formed as Brand Builders Rx, LLC, a Delaware limited liability company (the
Joint Venture). The Joint Venture was formed for the purpose of designing,
marketing, selling, and managing certain technologies and products including,
but not limited to, those contributed by the Company.

Brand Builders
International was founded by Ilonka Harezi, the driving force behind Teslar
Technology and the Philip Stein Teslar watches. The new Joint Venture, will
combine the expertise of the two entities for the re-positioning and
re-launching of the Hydron named brands, utilizing the marketing and
distribution expertise of Ilonka Harezi, her success with the Teslar brand and
her Brand Builders International team.

During the
past several years the Company has attempted to expand its sales through
various marketing efforts. The Company was unable to finance these marketing
initiatives from internally generated cash flow alone and when required, raised
the needed capital through a number of private placements in its effort to
remain solvent. Over the past year, the negative cash position became critical
and the Companys Board of Directors weighed a wide variety of alternatives,
including bankruptcy, assignment for the benefit of creditors, the selling of
assets and/or potential mergers with other parties. Only the merger option was
deemed to provide any potential benefit to existing shareholders

F-5

Hydron Technologies, Inc
Notes to Consolidated Financial Statements
September 30, 2008 and 2007

The Company
began discussions with Ilonka Harezi and one other interested prospective
investor during the first calendar quarter of 2008. Because of the limited
financial resources of the Company, the Company was unable to engage an outside
placement agent and instead relied on leads obtained from the officers and
directors of the Company. These discussions failed because, at that time the
Companys balance sheet and substantially negative cash flow were significant
liabilities that offset the potential value the Company would contribute to a
merger. A subsequent discussion with another potential merger partner failed
for similar reasons.

As conditions
deteriorated, the Company was faced with the possibility of immediate
bankruptcy, which would have effectively eliminated all shareholder equity. The
Companys Board of Directors sought ways to quickly and decisively protect
shareholder value. Talks were reopened with Ms. Harezi and initial terms to
create a 50/50% LLC were agreed upon in principle.

Under the
terms of the proposed Agreement, the Company would contribute cash,
substantially all of its operating assets and would license its patented
technologies to the Joint Venture. Harezi would contribute cash, on-going
financing, and a new headquarters and provide sales and marketing expertise,
including public relations, the filming of television commercials, production
of print media and the building of a sales force in the United States and
internationally. The proposed Agreement was contingent upon the Company
eliminating all debt and being current on its payables.

Faced with the
necessity to raise the money required to meet the terms of the Joint Venture
Agreement and to fund the Companys anticipated expenses until the Joint
Venture is expected to deliver results, the Board concluded that the best
available option for the Company was to raise the funds by soliciting
interest in the Companys only other salable asset, the potential value of
the cross-royalty arrangement with Valera Pharmaceuticals, Inc. (Valera), which
is held indirectly by the Company through its interest in Hydron Royalty
Partners, Ltd., LLLP, a Florida limited partnership (the Partnership). Based
on the Companys balance sheet, debt position, and the results of other options
explored to date, the Company determined that no other available option would
raise the necessary funds in the timeframe necessary to complete the Joint
Venture.

On July 2, by
Unanimous Written Consent, the Board of Directors authorized an amendment to
its Certificate of Incorporation (the Certificate) to designated the terms of a
Series A Preferred Shares offering from authorized undesignated share of
Preferred Stock as allowed by its Certificate and New York law. On July 30, the
Company closed on a $1.3 million private placement of Series A Preferred Shares
which was raised primarily through existing accredited Hydron common
shareholders.

Following the
closing of the Series A Preferred Shares offering, funds received by the
Company relating to any royalties derived by the Partnership from the Valera
Agreement will be paid as dividends to the extent legally available to holders
of the Series A Preferred Shares, subject to the terms of the Series A
Preferred Shares and New York law. Holders of the Series A Preferred Shares are
not entitled to receive dividends or other distributions, other than the stated
value of their shares, derived from any other revenues of the Company,
including distributions, if any, made to the Company by the Joint Venture.

F-6

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

Principles of Consolidation

The
consolidated financial statements include the accounts of Hydron Technologies,
Inc. and its wholly-owned subsidiary CRI purchased as of July 1, 2005, and its
majority owned limited liability limited partnership, Hydron Royalty Partners
Ltd., LLLP. All significant inter-company transactions have been eliminated.

Use of Estimates

The
preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company
considers all highly liquid investments with an original maturity of three
months or less to be cash equivalents. The credit risk associated with cash
equivalents is considered low due to the credit quality of the issuers of the
financial instruments.

Restricted cash

At September
30, 2008, the Company had restricted cash of $7,823, all of which were covered
by the Federal Deposit Insurance Commission, which represents funds from a
consolidated entity, that are not available for use in the Companys normal
operations.

Concentration of Credit Risk

The Company is
subject to concentrations of credit risk primarily from cash. The Company has
deposits in excess of the FDIC (Federal Deposit Insurance Corporation)
insurance limit. At September 30, 2008, the Company was approximately $336,000
in excess of the $100,000 per bank per company limit. The Company has not
experienced any losses on these accounts. During October 2008, the FDIC
increased the insured amounts at participating financial institutions to
$250,000 and provided unlimited coverage for non-interest bearing transaction
accounts. While the Company periodically evaluates the credit quality of the
financial institutions in which it holds deposits, it cannot reasonably
alleviate the risk associated with the sudden possible failures of such
institutions.

Trade accounts
receivable are due primarily from contract manufacturing customers and are
usually paid to the Company within 30 days after receipt of goods. The Company
performs ongoing evaluations of its significant customers and does not require
collateral, although in some cases it requires deposits or advances.

Inventories

Inventories
are valued at the lower of cost or market, on a first-in, first-out (FIFO)
basis and include finished goods, components and raw materials.

F-7

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

Impairment of Long-Lived Assets

In accordance
with Statement of Financial Accounting Standards (SFAS) No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, the Company periodically
reviews its long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be fully
recoverable. The Company recognizes an impairment loss when the sum of expected
undiscounted future cash flows is less than the carrying amount of the asset.
The amount of impairment is measured as the difference between the assets
estimated fair value and its book value. The Company did not record any
impairment charges during the twelve months ended September 30, 2008.

Property and Equipment

Property and
equipment, consisting primarily of furniture and equipment, is carried at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, ranging from four to six years.

Deferred Product Costs

Deferred
product costs consist primarily of costs incurred for the purchase and
development of patents and product rights. The deferred product costs are being
amortized over their estimated useful lives of five to seventeen years using
the straight-line method.

Income Taxes

Income
taxes are accounted for in accordance with SFAS No. 109, Accounting for Income
Taxes. SFAS No. 109 requires the recognition of deferred tax assets and
liabilities to reflect the future tax consequences of events that have been
recognized in the Companys financial statements or tax returns. Measurement of
the deferred items is based on enacted tax laws. In the event the future consequences
of differences between financial reporting bases and tax bases of the Companys
assets and liabilities result in a deferred tax asset, SFAS No. 109 requires an
evaluation of the probability of being able to realize the future benefits
indicated by such assets. A valuation allowance related to a deferred tax asset
is recorded when it is more likely than not that some or the entire deferred
tax asset will not be realized.

Common Stock, Common Stock Options

In
December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which
replaces SFAS No. 123 and supersedes APB Opinion No. 25. Under SFAS No. 123(R),
companies are required to measure the compensation costs of share based
compensation arrangements based on the grant date fair value and recognize the
costs in the financial statements over the period during which employees are
required to provide services. Share based compensation arrangements include
stock options, restricted share plans, performance based awards, share appreciation
rights and employee share purchase plans. In March 2005 the SEC issued Staff
Accounting Bulletin No. 107, or SAB 107. SAB 107 expresses views of the staff

F-8

Hydron Technologies, Inc
Notes to Consolidated Financial Statements
September 30, 2008 and 2007

regarding the
interaction between SFAS No. 123(R) and certain SEC rules and regulations and
provides the staffs views regarding the valuation of share based payment
arrangements for public companies. SFAS No. 123(R) permits public companies to
adopt its requirements using one of two methods. On April 14, 2005, the SEC
adopted a new rule amending the compliance dates for SFAS 123R. Companies may
elect to apply this statement either prospectively, or on a modified version of
retrospective application under which financial statements for prior periods
are adjusted on a basis consistent with the pro forma disclosures required for
those periods under SFAS 123. Effective January 1, 2006, the Company has fully
adopted the provisions of SFAS No. 123R and related interpretations as provided
by SAB 107. Such compensation amounts, if any, are amortized over the
respective vesting periods of the option grant. SFAS 123R requires that the
deferred stock-based compensation on the consolidated balance sheet on the date
of adoption be netted against additional paid-in capital.

For the twelve
month periods ended September 30, 2008 and 2007, the Company recorded
stock-based compensation expense of $21,156 and 69,581 respectively.

Earnings (loss) Per Share

The financial
statements are presented in accordance with Statement of Financial Accounting
Standards No. 128 (SFAS 128), Earnings Per Share. Basic earnings per share
is computed using the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflect the potential dilution
from the exercise or conversion of securities into common stock.

For the
net-loss periods ended September 30, 2008 and 2007, we excluded any effect of
the 9,293,500 and 8,386,000 outstanding options and warrants, respectively, as
their effect would be anti-dilutive.

Revenue Recognition

The
Company recognizes revenue when:


Persuasive
  evidence of an arrangement exists,
Shipment has
  occurred,
Price is
  fixed or determinable, and
Collectability
  is reasonably assured.Subject to
this criteria, the Company recognizes revenue at the time of shipment of the
relevant merchandise. The Company offers its individual consumer customers a
thirty-day warranty and estimates an allowance for sales returns based on
historical experience with product returns. For the Companys formulation and
contract manufacturing business, revenue is recognized when the work is
complete, the client approves the formula by written correspondence, and the
product is shipped.

F-9

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

Deferred Revenues

Deferred
revenues represent prepayments to the Company for merchandise that had not yet
been shipped to the customer. The Company will recognize the advances as
revenue as customers take delivery of the goods, in compliance with its revenue
recognition policy.

Shipping and Handling Fees

The Company
follows the provisions of Emerging Issues Task Force Issue No. 00-10,
Accounting for Shipping and Handling Fees and Costs. Any amounts billed to
third-party customers for shipping and handling is included as a component of
revenue. Shipping and handling costs incurred are included as a component of
cost of sales.

Cost of Sales

Prior to the
acquisition of CRI, products were manufactured through third parties under
contract and cost of sales included the cost of ingredients, packaging
material, assembly and processing costs. Currently, with manufacturing
capability, most products are manufactured in house. Inbound freight, internal
transfers, and component handling costs are charged to cost of sales. Costs
associated with shipping product to customers are included in cost of sales.
The cost of warehousing
finished product that is available for sale is included in selling, general and
administrative expenses.

Research and Development Costs

Research and
development expenditures, consist of costs incurred in performing research and
development activities, and are expensed as incurred. For the fiscal years
ended September 30, 2008 and 2007, expenses charged to Research and Development
were $2,161 and $4,154, respectively.

Advertising

Advertising
costs are expensed as incurred and are included in Selling, general and
administrative expenses. Advertising expenses amounted to $26,026 and $22,497
for the fiscal years ended September 30, 2008 and 2007, respectively.

Reclassifications

Certain prior
period balances have been reclassified to conform to the current years
presentation. These reclassifications had no impact on previously reported
results of operations or stockholders deficit.

F-10

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

Change in year end

On September
20, 2007, at a meeting of the Board of Directors (Board) of the Company the
Board approved a change in the Companys fiscal year from a fiscal year ending
December 31 to a fiscal year ending on September 30. The Company filed a
transition report on Form 10-KSB for the nine-month fiscal year ending
September 30, 2007.

Fair Value of Financial Instruments

The carrying
value of cash, accounts receivables, deposits, accounts payable, and other
payables approximates fair value because of their short term maturities

Recent accounting
Pronouncements

In December
2007, the FASB issued SFAS No. 141R, BusinessCombinations, which replaces SFAS
No. 141. The statement retains the purchase method of accounting for
acquisitions, but requires a number of changes, including changes in the way
assets and liabilities are recognized in purchase accounting. It also changes
the recognition of assets acquired and liabilities assumed arising from
contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related
costs as incurred. SFAS No. 141R is effective for our c company beginning
December 15, 2008 and will apply prospectively to business combinations
completed on or after that date. Management believes that, for the foreseeable
future, this Statement will have no impact on our financial statements once
adopted.

In December
2007, the FASB issued SFAS No. 160, NoncontrollingInterests in Consolidated Financial Statements, an
amendment of ARB No. 51,which changes the accounting and
reporting for minority interests. Minority interests will be recharacterized as
noncontrolling interests and will be reported as a component of equity separate
from the parents equity, and purchases or sales of equity interests that do
not result in a change in control will be accounted for as equity transactions.
In addition, net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement and,
upon a loss of control, the interest sold, as well as any interest
retained, will be recorded at fair value with any gain or loss recognized in
earnings. SFAS No. 160 is effective for our company effective December 15,
2008 and will
apply prospectively, except for the presentation and disclosure requirements,
which will apply retrospectively. Management believes that, for the
foreseeable future, this Statement will have no impact on our financial
statements once adopted.

In March 2008,
the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 161, Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133,which requires additional disclosures about
the objectives of the derivative instruments and hedging activities, the method
of accounting for such instruments under SFAS No. 133 and its related
interpretations, and a tabular disclosure of the effects of such instruments
and related hedged items on our financial position, financial performance, and
cash flows. SFAS No. 161 is effective for our company beginning December
15, 2008. Management believes that, for the foreseeable future, this Statement
will have no impact on the financial statements once adopted.

F-11

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

The FASB
issued SFAS No. 157, Fair Value Measurements (SFAS 157), defines fair value
as used in numerous accounting pronouncements, establishes a framework for
measuring fair value and expands disclosure of fair value measurements. In
February 2008, the FASB issued FASB Staff Position, FSP FAS 157-2Effective
Date of FASB Statement No. 157 (FSP 157-2), which delays the effective date
of SFAS 157 for one year for certain nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). Excluded from
the scope of SFAS 157 are certain leasing transactions accounted for under SFAS
No. 13, Accounting for Leases. The exclusion does not apply to fair value
measurements of assets and liabilities recorded as a result of a lease
transaction but measured pursuant to other pronouncements within the scope of
SFAS 157. We have not yet determined whether we will adopt SFAS 157.

In April 2008,
FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible
Assets (FSP 142-3) was issued. This standard amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under FASB Statement No. 142,
Goodwill and Other Intangible Assets. FSP 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Early adoption is prohibited. We
have not determined the impact on our financial statements of this accounting
standard.

In May 2008,
the FASB issued Statement of Financial Accounting Standards (SFAS) No. 162,
The Hierarchy of Generally Accepted Accounting Principles. The new standard
is intended to improve financial reporting by identifying a consistent
framework, or hierarchy, for selecting accounting principles to be used in
preparing financial statements that are presented in conformity with U.S.
generally accepted accounting principles (GAAP) for non-governmental entities.
We are currently evaluating the effects, if any, that SFAS No. 162 may have on
our financial reporting.

Note 2. Inventories

Inventories
consisted of the following at September 30, 2008 and 2007:

2008

2007Finished goods

$
45,532

$
103,385Raw materials and components


704,033


569,680749,565


673,065less: inventory valuation allowance


(291,964
)

(330,393
)Inventories, net

$
457,601

$
342,672F-12

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

Note 3. Trade
Accounts Receivable

Accounts
receivable consisted of the following at September 30, 2008 and 2007:

2008

2007Accounts receivable

$
116,896

$
61,303less: allowance for doubtful
  accounts


(20,000
)

(30,000
)Accounts receivable, net

$
96,896

$
31,303The Companys
allowance for doubtful accounts was $20,000 for the fiscal year ended September
30, 2008 and was $30,000 for fiscal year ended September 30, 2007.

Note 4.
Property and Equipment

At September
30, 2008 and 2007, property and equipment consisted of the following:

2008

2007Furniture
  and equipment

$
435,253

$
393,067Less
  accumulated depreciation


(327,217
)

(284,360
)$
108,036

$
108,707Depreciation
expense for the fiscal years ended September 30, 2008 and 2007 was $42,856 and
$39,648, respectively.

Note 5. Deferred Product Costs

The
Company was granted U.S. Patent No. 4,883,659, dated November 28, 1989, and
U.S. Patent No. 5,039,516, dated August 13, 1991, which cover a stable
moisturizing emulsion containing an unusual emulsifying agent, as well as the
Hydron polymer and a unique combination of ingredients. These patents have
expiration dates of November 28, 2006 and August 13, 2008, respectively. During
1999 the Company was granted U.S. Patent No. 5,879,684 for its Line Smoothing
Complex formula. This product has been clinically shown to reduce fine lines
and wrinkles. The patent has an expiration date of April 11, 2017.

The
Company was granted U.S. Patent No. 6,984,391 dated January 10, 2006, which is
titled Compositions and Methods for Delivery of Skin Cosmaceuticals. This
patent covers the Companys unique self-adjusting pH emulsion system.

F-13

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

At September
30, 2008 and 2007 deferred product costs consisted of the following:

2008

2007Deferred
  product cost

$
351,818

$
351,818less
  accumulated amortization


(257,841
)

(240,280
)$
93,977

$
111,538Amortization
expense for the fiscal years ended September 30, 2008 and 2007 was
approximately $17,500 and $23,700, respectively.

Estimated future
amortization of deferred product costs are as follows:

2009


12,7382010


9,4322011


9,0642012


8,6962013


8,323thereafter


45,724$
93,977Note 6. Acquisition

On July 1,
2005, the Company acquired all the outstanding common stock of Clinical
Results, Inc. (CRI). As consideration, the Company issued 2,000,000 shares of
common stock (fair value of $260,000). The acquisition was accounted for using
the purchase method of accounting. The results of operations are included in
the consolidated statements of operations since the date of acquisition.
Intangible assets which are comprised of customer lists, formularies, product
developments and employment contract for key employee of $241,311 were recorded
in this transaction and are being amortized over 3 to 10 years using the
straight line method. At September 30, 2008 and 2007 acquisition costs and
accumulated amortization are as follows:

2008

2007Intangibles

$
241,311

$
241,311less: accumulated
  amortization


(112,952
)

(81,322
)$
128,359

$
159,989F-14

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

Post-acquisition
amortization of the identifiable intangible assets for Amortization for the
fiscal years ended September 30, 2008 and 2007 was approximately $31,600 and
$35,800, respectively.

Estimated
future amortization of the identifiable intangible assets is as follows:

2009

$
19,1132010

$
19,1132011

$
19,1132012

$
19,1132013

$
19,113Thereafter

$
32,794$
128,359Note 7. Royalty Agreements

Pursuant to an
agreement dated June 25, 1976, the Company, then known as Dento-Med Industries,
Inc., entered into an agreement (the Original Agreement) with The National
Patent Development Corporation (now known as GP Strategies) relating to certain
products composed wholly or partly of the Hydron polymer (the Polymer). The
Original Agreement has been amended in several significant respects by an
agreement dated November 30, 1989 that amends and restates the Original
Agreement (the Current Agreement; and, as so amended and restated, the
Hydron Agreement). In June 2000, GP Strategies decided to reorganize and in
connection with this reorganization contributed the Hydron Agreement to its
subsidiary, Hydro Med Sciences, Inc., now known as Valera Pharmaceuticals, Inc.
(Valera), as part of a spin-off of its drug delivery system business. In April
2007, Valera was acquired by Indevus Pharmaceuticals, Inc. (Indevus).

The Hydron
Agreement provides for certain cross-royalty payments by its parties, and also
grants rights to each party to certain intellectual property and the right to
develop certain Products (as defined below) that include the Polymer. Under the
terms of the Hydron Agreement, the parties are required to pay royalties to
each other of five percent (5%) of such partys net sales of products produced
with the use of the Polymer (Products), other than certain Products or within
certain fields set forth in a schedule to the Hydron Agreement.

Pursuant to
the Hydron Agreement, the Company was granted an exclusive, worldwide license
to manufacture, market or use products composed of, or produced with the use
of, the Polymer in certain consumer and oral health fields while Valera was
granted the exclusive right to manufacture, sell or distribute any prescription
drug or medical device and certain other products made with the Polymer. The
agreement continues indefinitely, unless terminated earlier by the parties. To
date, only the Company has been obligated to make royalty payments under the
Hydron Agreement. However, based on a review of reports filed by Indevus with
the Securities Exchange Commission and a review of Indevuss website, the
Company understands that Valera has Products under development that represent
potential royalty payments to the Company under the Hydron Agreement. There can
be no assurance that any such Products will ever be brought to market or, if
they are brought to market, the amount or timing of any future royalty payments
that may be payable to the Company under the Hydron Agreement.

F-15

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

In August
2004, the Company contributed its rights under the Hydron Agreement to Hydron
Royalty Partners Ltd., LLP, a Florida limited liability limited partnership
(the Partnership) pursuant to the terms of a Capital Contribution and License
Agreement (the Contribution Agreement). Under the Contribution Agreement, in
consideration of the contribution of its rights under the Hydron Agreement, the
Company received a 50.001% interest in the Partnership; and the Partnership
agreed to (i) pay the Companys then outstanding royalty payment obligations to
Valera under the Hydron Agreement and future royalty obligations payable to
Valera up to an aggregate of $300,000, and (ii) license back to the Company all
rights granted to the Company under the Hydron Agreement on an exclusive
world-wide royalty free basis with the right to grant sublicenses there under,
and to manufacture, sell or distribute any product permitted to be
manufactured, sold or distributed by the Company under the Hydron Agreement.

The Company is
the General Partner of the Partnership. Under the terms of the Partnerships
Limited Liability Limited Partnership Agreement (the Partnership Agreement),
the Partnerships limited partners may, by the affirmative vote of all of the
partners who are not affiliates of the General Partner, remove the General
Partner for certain specified reasons, including the breach by the Company of
its obligations under the Contribution Agreement, including the Companys
obligation to make royalty payments owed under the Hydron Agreement to Valera.

Under the
terms of the Partnership Agreement, each partner is entitled to receive
distributions from available funds including royalty payments received under
the Hydron Agreement in proportion to its respective interest in the
Partnership.

Under the
Valera Agreement an aggregate of $5,069 and $12,275 was accrued and unpaid as
of September 30, 2008 and 2007, respectively. For the fiscal year ended
September 30, 2008 and 2007, the Company recorded royalty expenses of
approximately $11,000 and $5,100, respectively. While the Company has not
received any royalty payments, or been advised of any sales that would entitle
it to royalty payments to date, according to the Indevus website, certain
Hydron implant milestones are noteworthy:


Indevus
  currently markets two (2) once-yearly Hydron Implants. One addressing
  prostate cancer and the other, addressing central precocious puberty, both of
  which were specifically excluded from cross-royalties. To date, to the extent
  of the Companys belief, these implants are providing appropriate dosing for
  the life of the implant.
On November
  28, 2007, Indevus reported positive results from a Phase II Octreotide
  Implant trial, along with their expectation that a Phase III trial will begin
  in the first half of 2008. If ultimately successful in bringing the
  Octreotide implant to market, this implant is likely to be the first product
  subject to the cross-royalty arrangement.
On September
  30, 2008, Indevus announced the initiation of a Phase III clinical trial of
  the Octreotide Implant for Acromegaly.F-16

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

Note 8. Accrued Liabilities

At
September 30, 2008 and 2007, accrued liabilities consisted of the following:

2008

2007Dividends payable

$
83,163

$
83,163Director fee payable


138,520


123,520Professional fees


40,500


40,754Other


43,052


50,057$
305,235

$
297,494Note 9. Income Taxes

The Company
accounts for income taxes under FASB Statement No. 109, Accounting for Income
Taxes (FASB 109). Deferred income tax assets and liabilities are determined
based upon differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Due to losses, the
Company has not provided for current income tax expense in either the fiscal
year ended September 30, 2008 or the nine months ended September 30, 2007.

Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Companys net deferred income taxes are as follows:

2008

2007Net operating loss carryforwards

$
7,324,000

$
7,389,000Tax credit carry forwards


168,000


168,000Other


498,000


259,000Deferred tax assets


7,990,000


7,816,000Less valuation allowance


(7,990,000
)

(7,816,000
)Total net deferred taxes

$


$
FASB 109
requires a valuation allowance to reduce the deferred tax assets reported if,
based on the weight of the evidence, it is more likely than not that some
portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative, management has
determined that a $7,990,000 valuation allowance at September 30, 2008 is
necessary to reduce the deferred tax assets to the amount that will more likely
than not be realized. The valuation allowance increased by $174,000 in 2008.

F-17

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

As of
September 30, 2008, the Company had an unused net operating loss carry forward
of approximately $20,049,000 available for use on its future corporate income
tax returns. These net operating loss carry forwards expire in September 2028.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of
any of the Companys net operation loss and credit carry forwards may be
limited if cumulative changes in ownership of more than 50% occur during any
three year period.

The
reconciliation of income tax rates, computed at the U.S. federal statutory tax
rates, to income tax expense is as follows:

2008

2007Tax at U.S. statutory rates


34
%

34
%State income taxes, net of federal tax benefit


3
%

3
%Permanent differences


-4
%

-4
%Increase in valuation allowance


-33
%

-33
%0
%

0
%Note 10. Loans Payable

On June 14,
2005, the Company borrowed an aggregate of One Hundred Fifty Thousand Dollars
($150,000) (collectively, the Loans) from three individual lenders
(collectively, the Lenders), including individuals who are (i) the Chairman
of the Board and Interim President, and (ii) a second director of the Company.

In
connection with the Loans, the Company issued to each of the Lenders a
promissory note in the principal amount of Fifty Thousand Dollars ($50,000)
(individually, a Note and collectively, the Notes) providing for (a)
quarterly payments of interest at ten percent (10%) per annum and (b) repayment
of principal in a balloon payment on the second anniversary of the date of the
Notes. Under the terms of the Notes, the Company may elect to pay quarterly
interest to the holders of the Notes in shares of common stock, of the Company
(the Common Stock), in an amount calculated by dividing the amount of
interest due and payable by ten cents ($.10). The Notes also provide that, in
the event of a default by the Company under the Notes, the holders may elect to
receive payment of principal and accrued and unpaid interest in shares of
Common Stock, in an amount calculated by dividing the amount of principal and
accrued and unpaid interest payable by the Average Market Price for a share
of Common Stock. Under the terms of the Notes, Average Market Price means the
average closing sale price for a share of

F-18

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

Common Stock
measured over the last ten trading days of the month preceding the interest
payment date or, if no trading in the Common Stock has occurred during such
period, the average closing sale price on the last date on which a share of
Common Stock was sold in over-the-counter trading in the Common Stock. In the
event that no shares of Common Stock have traded in the over-the-counter market
for a period of six months or more, the Average Market Price shall be the fair
market price for a share of Common Stock as determined in good faith by the
Board of Directors of the Company. In October 2005, the Company elected to pay
the accrued interest due on the Notes of $11,040 in stock of the Company and
issued 44,000 shares at $.25 to the Note holders. In January 2006, the Company
elected to pay the accrued interest due on the Notes of $13,230 in stock of the
Company and issued 37,800 shares at $.35 to the Note holders. In March 2006,
the Company elected to pay the accrued interest due on the notes of $21,546 in
stock of the Company and issued 37,800 shares at $.57 to the Note holders. In
July 2006, the Company elected to pay the accrued interest due on the notes of
$16,254 in stock of the Company and issued 37,800 shares at $.43 to the Note
holders. In January 2007, the Company elected to pay the accrued interest due
on the notes of $15,120 in stock of the Company and issued 37,800 shares at
$.17 to the Note holders, and 37,800 shares at $.23 to the Note holders. In May
2007, the Company elected to pay the accrued interest due on the notes and
issued 37,800 shares at $.17 to the Note holders.

In addition,
in connection with the Loans, each Lender received a Common Stock Purchase
Warrant (collectively, the Warrants) entitling the holder to purchase One
Hundred Thousand (100,000) shares of Common Stock at an exercise price of ten
cents ($.10) per share for a five-year period. The warrants were valued using
the Black Scholes model at $24,000, which is being amortized as interest
expense over the life of the notes.

The Notes and
the Warrants each provide that in the event that the Company shall grant piggy
back registration rights to any other party to cause the Companys Common
Stock or any security exercisable or exchangeable for, or convertible into,
shares of Common Stock to be included in a registration statement filed by the
Company for sale by any selling shareholder or by the Company, the Company will
grant the holders of the Notes and Warrants similar registration rights.

On May 20,
2007, the Company agreed to extend and amend certain of the terms of the loans
(collectively, the Loan Extension) made to the Company on June 14, 2005
(collectively, the Original Loans) by Mr. Saul, Richard Banakus, the
Chairman, interim president and a director of the Company, and Regis Synan
(individually, a Lender and collectively, the Lenders) in the amounts of
$50,000, $50,000 and $50,000, respectively. Under the terms of the Loan
Extension, the Lenders agreed to extend the maturity date of the Original Loans
from June 14, 2007 to June 14, 2008. In consideration for the Loan Extension,
the Company agreed to grant each Lender a common stock warrant (the Loan
Extension Warrants) exercisable for Seventy Five Thousand (75,000) shares of
the Common Stock for a five-year period at an exercise price of $0.20 per share
of Common Stock. The warrants were valued using the Black Scholes model at
$43,400, which is being amortized as interest expense over the life of the
notes.

In addition,
the Lenders agreed to continue to allow the Company to pay quarterly interest
in cash or in shares of Common Stock. In the case of interest paid in shares of
Common Stock, the Company agreed to modify the valuation for such shares to
$0.20 per share of Common Stock.

F-19

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

The Board of
Directors of the Company approved the Loan Extension and the Loan Extension
Warrants unanimously with Messrs. Saul and Banakus abstaining from the vote,
and agreed to reserve sufficient shares of Common Stock in the event of the
exercise of the Loan Extension Warrant. In
June 2007, the Company elected to pay the accrued interest due on the notes and
issued 31,260 shares at $.22 to the Note holders. In October 2007, the Company
elected to pay the accrued interest due on the notes of $3,750 in stock of the
Company and issued 18,750 shares at $.20 to the Note holders. The loan
principal was converted in the private offering dated July 30, 2008. At
September 30, 2008 the Company had $12,482 in accrued interest due to the Note
holders.

On May 22,
2007, Ronald J. Saul, a director of Hydron Technologies, Inc., lent the Company
One Hundred Thousand Dollars ($100,000) (the Loan). The term of the Loan is
six months and bears interest at the rate of ten percent (10%). Interest on the
Loan is payable monthly and may be paid in cash, or at the option of the
Company, in shares of common stock of the Company (Common Stock), valued for
this purpose at the average of the high and low sale prices for a share of
Common Stock averaged over the last ten days on which the Common Stock traded.
In addition, in consideration of the Loan, the Company has granted Mr. Saul a
common stock warrant (the Loan Warrant) exercisable for One Hundred Thousand
(100,000 shares of Common Stock for a five-year period at an exercise price of
$0.2115 per share of Common Stock. The warrants were valued using the Black
Scholes model at $21,040, which is being amortized as interest expense over the
life of the notes. In June 2007, the Company elected to pay the accrued
interest due on the note of $833 in stock of the Company and issued 3,771
shares at $.221 to the Note holder. In August 2007, the Company elected to pay
the accrued interest due on the note of $1,666 in stock of the Company and
issued 4,433 shares at $.188 and 5,274 shares at $.158 to the Note holder. In
October 2007, the Company elected to pay the accrued interest due on the note
of $833 in stock of the Company and issued 5,258 shares at $.1585 to the Note
holder. The loan principal was converted in the private offering dated July 30,
2008. At September 30, 2008, the Company had accrued $8,555 of interest on the
note due to the Note holder.

The Board of
Directors of the Company approved the Loan and the Loan Warrant unanimously
with Mr. Saul abstaining from the vote, and agreed to reserve sufficient shares
of Common Stock in the event of the exercise of the Loan Warrant. The purpose
of the Loan was to provide the Company with additional cash to remain current
on its operating expenses, help reestablish credit terms with the Companys
vendors, reduce outstanding payables and purchase additional raw materials on
more advantageous terms.

On August 14,
2007, Ronald J. Saul, a director of Hydron Technologies, Inc., lent the Company
Twenty five Thousand Dollars ($25,000) (the Loan). The term of the Loan is
two weeks and expires on August 28, 2007 and bears interest at the rate of ten
percent (10%) per annum to be paid in cash at the expiration of the loan
agreement. The loan expiration was extended until it was converted in the
private offering dated October 3, 2007.

On April 9,
2008, the Company borrowed Forty Thousand Dollars ($40,000) (the Loan) from
Richard Banakus, the Chairman, interim President and a director of the Company
(the Lender). In connection with the Loan, the Company issued to the Lender a
promissory note in the principal amount of Forty Thousand Dollars (the Note)
providing for the payment of principal and interest at the rate of five percent
(5%) per annum, in a balloon payment on the earlier of (i) ninety (90) days
from the date of April 9, 2008, or (ii) the date of the closing of a
transaction with net proceeds payable to the Company from any debt or equity
transaction.

F-20

Hydron Technologies, Inc
Notes to Consolidated Financial Statements
September 30, 2008 and 2007

In addition,
in connection with the Loan, the Lender received a common stock purchase
warrant (the Warrant) entitling Mr. Banakus to purchase Fifty Thousand
(50,000) shares of Common Stock at an exercise price of Eight and Four-Tenths
of a Cent ($.084) per share for a five-year period. The Warrant provides that
in the event that the Company shall grant piggy back registration rights to
any other party to cause the Companys Common Stock or any security exercisable
or exchangeable for, or convertible into, shares of Common Stock to be included
in a registration statement filed by the Company for sale by any selling
shareholder or by the Company, the Company will grant the holders of Warrant
similar registration rights. The warrants were valued using the Black Scholes
model at $4,200, which is being amortized as interest expense over the life of
the notes. The loan principal was converted in the private offering dated July
30, 2008. At September 30, 2008, the Company had accrued $614 of interest on
the note due to the Note holder.

During the
year ended September 30, 2008, the Company borrowed $40,000 from Hydron Royalty
Partners Ltd., LLLP, a Florida limited liability partnership (the Partnership);
The Company is the general partner of the Partnership which includes two
directors of the Company and several significant shareholders of the Company as
limited partners. Under the terms of the promissory note evidencing the loan,
the partnership may, but is not obligated to, lend up to an aggregate $40,000
in principal amount to the Company. Amounts lent bear interest at 10% per
annum. The outstanding principal and interest on the note is payable on
December 6, 2008. This loan is still outstanding and continues to accrue
interest. The Company had accrued $877 of interest on the note due to the Note
holder. This amount is eliminated in consolidation.

2008

2007Loans payable

$


$
275,000Accrued interest


21,651


5,117less:deferred financing costs


(0
)

(36,824
)Loans payable, net

$
21,651

$
243,293Note 11. Stock Options and Warrants

The number of
shares of common stock reserved for issuance was 9,293,500 for September 30,
2008 and 8,386,000 for September 30, 2007.

F-21

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

Stock
Option Plans

2003
Stock Plan

On November
19, 2003, the Board approved, subject to shareholder approval, the 2003 Stock
Plan (the 2003 Plan). The shareholders approved this plan on November 15,
2004. The 2003 Plan permits the grant of nonqualified and incentive stock
options, as well as restricted stock purchases. The form of the equity is left
up to the discretion of the committee of the Board (or the Board, if no
committee) at the time of each grant. This 2003 Plan is designed to consolidate
and replace two Stock Option Plans, which have expired; the 1993 Stock Option
Plan and the 1997 Non-Employee Director Stock Option Plan. The purpose of the
2003 Plan is to assist the Company in attracting, retaining, and motivating key
employees, officers, directors, and consultants by offering selected individuals
an opportunity to acquire a proprietary interest in the success of the Company.

During the
fiscal year ended September 30, 2008, three shareholders were issued rights to
acquire 65,000 common shares with a fair value of $4,875. The fair value of the
shareholders rights is the estimated value at May 1, using the Black-Scholes
Option Pricing Model with the following weighted average assumptions: Exercise
price of $0.075; expected volatility of 388% a risk free interest rate of 5%;
and expected term of 5 years.

Activity with respect to these plans is as
follows:

Number ofOptions/Warrants

PricePer Share

WeightedAverageExercisePrice

IntrinsicValueOutstanding at December 31, 2006


1,196,500


$0.13 to $0.81

$
0.38

$
0.00Stock options granted


345,000


$.118 to $.2115

$
0.20

$
0.00Stock options expired


(290,000
)

$0.2715 to $.3155

$
0.29

$
0.00Outstanding at September 30, 2007


1,251,500


$0.11 to $0.81

$
0.33

$
0.00Stock options granted


65,000


$0.075

$
0.08

$
0.00Stock options expired


(165,000
)

$0.243 to $.291

$
0.27

$
0.00Outstanding at September 30, 2008


1,151,500


$0.11 to $0.81

$
0.32

$
0.00All intrinsic
values are zero. There were no options outstanding, granted or exercised during
the fiscal year with an intrinsic value.

F-22

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

Other
Options

In
2008 62,500 options were exercised and the remaining 750,000 options expired on
December 9, 2007. As of September 30, 2008 no shares are outstanding.

Number of  Options/  WarrantsGranted and outstanding at September 30,
  2007


812,500Stock options granted (including extended
  options)


Stock options exercised


(62,500
)Stock options expired


(750,000
)Granted and outstanding at September 30,
  2008


The
Company has agreements with several consultants who provide financial, business
and technical advice to the Company in connection with the research,
development, marketing and promotion of its products and other matters. As part
of their compensation, these consultants were granted warrants and nonqualified
stock options to purchase shares of the Companys common stock at prices
representing the fair market value of the shares at the date of grant. Activity
with respect to options and warrants granted to these consultants is summarized
below:

Number ofOptionsWarrants

PricePer Share

AverageExercisePriceOutstanding at September 30, 2007


37,000


$0.29 to $0.50

$
0.43Stock options granted


Outstanding at September 30, 2008


37,000


$0.29 to $0.50

$
0.43Other
Warrants

On
November 14, 2003, the Company completed a non-brokered private placement of
2,210,000 Units at $.50 per Unit ($1,105,000) to accredited investors. Each
Unit is comprised of one share of Common Stock and one five-year warrant to buy
one additional Common Share at $1.00. As of September 30, 2008, all 2,210,000
warrants are outstanding.

In
June 2005, in connection with the loan payable, each Lender received a Common
Stock Purchase Warrant entitling the holder to purchase One Hundred Thousand (100,000)
shares of Common Stock at an exercise price of ten cents ($.10) per share for a
five-year period. The warrants were valued using the Black Scholes model at
$24,000, which will be amortized as interest expense over the life of the
notes.

F-23

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

On
May 20, 2007, the Company agreed to extend and amend certain of the terms of
the loans (collectively, the Loan Extension) made to the Company on June 14,
2005 (collectively, the Original Loans) by Mr. Saul, Richard Banakus, the
Chairman, interim President and a director of the Company, and Regis Synan
(individually, a Lender and collectively, the Lenders) in the amounts of
$50,000, $50,000 and $50,000, respectively. Under the terms of the Loan
Extension, the Lenders agreed to extend the maturity date of the Original Loans
from June 14, 2007 to June 14, 2008. In consideration for the Loan Extension,
the Company agreed to grant each Lender a common stock warrant (the Loan
Extension Warrants) exercisable for Seventy Five Thousand (75,000) shares of
the Common Stock for a five-year period at an exercise price of $0.20 per share
of Common Stock. The warrants were valued using the Black Scholes model at
$43,400, which is being amortized as interest expense over the life of the
notes. As of September 30, 2008, 425,000 warrants are outstanding.

In
February 2007, the Company completed a non-brokered private placement of
3,300,000 Units at $.10 per Unit ($330,000) to accredited investors. Each Unit
is comprised of one share of Common Stock and one five-year warrant to buy one
additional Common Share at $.10. On March 21, 2007 the Company closed on the
sale of an additional 500,000 Units at $.10 per Unit ($50,000) to an accredited
investor. On July 18, 2007 the Company closed on the sale of an additional
250,000 Units at $.14 per Unit ($35,000) to an accredited investor. As of
September 30, 2008, 3,550,000 warrants are outstanding.

On
May 22, 2007, Ronald J. Saul, a director of Hydron Technologies, Inc., lent the
Company One Hundred Thousand Dollars ($100,000) (the Loan). The term of the
Loan is six months and bears interest at the rate of ten percent (10%). Interest
on the Loan is payable monthly and may be paid in cash, or at the option of the
Company, in shares of common stock of the Company (Common Stock), valued for
this purpose at the average of the high and low sale prices for a share of
Common Stock averaged over the last ten days on which the Common Stock traded.
In addition, in consideration of the Loan, the Company has granted Mr. Saul a
common stock warrant (the Loan Warrant) exercisable for One Hundred Thousand
(100,000 shares of Common Stock for a five-year period at an exercise price of
$0.2115 per share of Common Stock. The warrants were valued using the Black
Scholes model at $21,040, which is being amortized as interest expense over the
life of the notes. As of September 30, 2008, 100,000 warrants are outstanding.

On
October 3, 2007, the Company, closed on a private offering of 1,400,000 units
(Units), comprised of one (1) share (Share) of its Common Stock and one (1)
warrant (Warrant) for the purchase of one (1) share of Common Stock at $0.13.
On October 30, 2007, the Company, closed on a private offering of 400,000 units
(Units), comprised of one (1) share (Share) of its Common Stock and one (1)
warrant (Warrant) for the purchase of one (1) share of Common Stock at $0.13.
As of September 30, 2008, 1,800,000 warrants are outstanding.

On
January 23, 2008, the Company, closed on a private offering of 600,000 units
(Units), comprised of one (1) share (Share) of its Common Stock and one (1)
warrant (Warrant) for the purchase of one (1) share of Common Stock at $0.13.
As of September 30, 2008, 600,000 warrants are outstanding.

F-24

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

On
April 9, 2008, the Company borrowed Forty Thousand Dollars ($40,000) (the
Loan) from Richard Banakus, the Chairman, interim President and a director of
the Company (the Lender). In connection with the Loan, the Lender received a
common stock purchase warrant (the Warrant) entitling Mr. Banakus to purchase
Fifty Thousand (50,000) shares of Common Stock at an exercise price of Eight
and Four-Tenths of a Cent ($.084) per share for a five-year period. The Warrant
provides that in the event that the Company shall grant piggy back
registration rights to any other party to cause the Companys Common Stock or
any security exercisable or exchangeable for, or convertible into, shares of
Common Stock to be included in a registration statement filed by the Company
for sale by any selling shareholder or by the Company, the Company will grant
the holders of Warrant similar registration rights. The warrants were valued
using the Black Scholes model at $4,200, which is being amortized as interest
expense over the life of the notes. As of September 30, 2008, 50,000 warrants
are outstanding.

The
Company recognized $21,156 and $69,581 in share based compensation expense for
the fiscal year ended September 30, 2008 and 2007, respectively. 65,000 options
were granted to employees during the fiscal year ended September 30, 2008.
Options to purchase 300,000 shares were granted to employees during the fiscal
year ended September 30, 2007.

For
the stock-based awards granted on or after January 1, 2006, the Company is
amortizing stock-based compensation expense on a straight-line basis over the
requisite service period, which is generally a one year vesting period. The
fair value for these options was estimated at the date of the grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions:

2008

2007Risk-free interest rate


5.0%


5.3%Expected life


5 years


5 yearsExpected volatility


388%


183%Expected dividend yield


0%


0%The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. As the
Companys stock options have characteristics significantly different than those
of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in managements opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its stock options.

The
weighted average remaining contractual life of all options outstanding at
September 30, 2008 was 2.64 years.

F-25

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

Note 12. Equity

Common Stock

For the fiscal
year ended September 30, 2008 and 2007, the Company recorded stock-based
compensation expense of $21,156 and $69,581 respectively

During the
fiscal year ended September 30, 2008, the Company issued 62,500 shares of
common stock in connection with the exercise of common stock options for net
proceeds of $12,500. Of these options, 62,500 were exercised at $0.20.

In connection
with loans payable to the Company (Note 10) during the fiscal year ended
September 30, 2008 the Company issued 24,008 shares of common stock, interest
on the Loans may be paid in cash, or at the option of the Company, in shares of
common stock of the Company (Common Stock), valued for this purpose at the average
of the high and low sale prices for a share of Common Stock averaged over the
last ten days on which the Common Stock traded.

On February 1,
2007, the Company, commenced an offering (Offering) of up to 3,300,000 units
(Units) comprised of one (1) share (Share) of its Common Stock and one (1)
warrant (Warrant) for the purchase of one (1) share of Common Stock having a
total gross purchase price of $330,000. On February 1, 2007 the Company closed
on the sale of 2,100,000 Units resulting in gross proceeds to the Company of
$210,000. On February 5, 2007, the Company closed on the sale of an additional
1,100,000 Units resulting in gross proceeds to the Company of $110,000. On
February 8, 2007 the Company closed on the sale of an additional 100,000 Units
resulting in gross proceeds to the Company of $10,000.

On March 21,
2007 the Company closed on the sale of an additional 500,000 Units resulting in
gross proceeds to the Company of $50,000.

On October 3,
2007, the Company, closed on a private offering of 1,400,000 units (Units),
comprised of one (1) share (Share) of its Common Stock and one (1) warrant
(Warrant) for the purchase of one (1) share of Common Stock. The Company
received gross proceeds of One Hundred Seventy Five Thousand Dollars ($175,000)
from the sale of Units in the Offering.

Among the
individuals who purchased Units in the Offering is Ronald J. Saul, a director
of the Company who together with his spouse purchased 300,000 Units pursuant to
two separate subscription agreements. Mr. Saul and his spouse paid for 200,000
Units by the cancellation of certain indebtedness owed to them by the Company
evidenced by a promissory note in the principal amount of Twenty Five Thousand
Dollars ($25,000) and paid for 100,000 Units by payment in cash.

On October 30,
2007, the Company, closed on a private offering of 400,000 units (Units),
comprised of one (1) share (Share) of its Common Stock and one (1) warrant
(Warrant) for the purchase of one (1) share of Common Stock of the Company
for each Unit purchased or a total of 400,000 Shares and 400,000 Warrants to
purchase Shares. The Company received gross cash proceeds of Fifty Thousand
Dollars ($50,000) from the sale of Units in the Offering.

F-26

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

Ronald J.
Saul, a director of the Company, purchased the 400,000 Units together with his
(Units), Ronald J. Saul, a director of the Company, purchased the 400,000
Units together with his spouse pursuant to a subscription agreement dated
October 30, 2007.

On January 23,
2008, the Company, closed on a private offering of 600,000 units (Units),
comprised of one (1) share (Share) of its Common Stock and one (1) warrant
(Warrant) for the purchase of one (1) share of Common Stock. The Company
received gross proceeds of Seventy Five Thousand Dollars ($75,000) from the
sale of Units in the Offering.

Among the
individuals who purchased Units in the Offering is Ronald J. Saul, a director
of the Company who together with his spouse purchased 200,000 Units and Richard
Banakus, the Chairman, interim president and a director of the Company, who
purchased 200,000 units pursuant to a subscription agreement.

On April 9,
2008, the Company borrowed Forty Thousand Dollars ($40,000) (the Loan) from
Richard Banakus, the Chairman, interim President and a director of the Company
(the Lender). In connection with the Loan, the Company issued to the Lender a
promissory note in the principal amount of Forty Thousand Dollars (the Note)
providing for the payment of principal and interest at the rate of five percent
(5%) per annum, in a balloon payment on the earlier of (i) ninety (90) days
from the date of April 9, 2008, or (ii) the date of the closing of a
transaction with net proceeds payable to the Company from any debt or equity
transaction.

In addition,
in connection with the Loan, the Lender received a common stock purchase
warrant (the Warrant) entitling Mr. Banakus to purchase Fifty Thousand
(50,000) shares of Common Stock at an exercise price of Eight and Four-Tenths
of a Cent ($.084) per share for a five-year period. The Warrant provides that
in the event that the Company shall grant piggy back registration rights to
any other party to cause the Companys Common Stock or any security exercisable
or exchangeable for, or convertible into, shares of Common Stock to be included
in a registration statement filed by the Company for sale by any selling
shareholder or by the Company, the Company will grant the holders of Warrant
similar registration rights. The warrants were valued using the Black Scholes
model at $4,200, which is being amortized as interest expense over the life of
the notes.

Preferred Stock

On July 30,
2008, Hydron Technologies, Inc., the Company, closed on a private offering (the
Offering) of thirteen thousand (13,000) of its Series A Preferred Shares. The
Company received aggregate gross proceeds of One Million Three Hundred Thousand
Dollars ($1,300,000) from the sale of the Series A Preferred Shares in the
Offering. After issuance of the Series A Preferred Shares sold in the Offering,
the Company has a total of 13,000 Series A Preferred Shares outstanding.

In the event
of any voluntary or involuntary liquidation, dissolution or winding up of the
Company, each of the then Series A Holders shall be entitled to be paid out of
the assets of the Company available for distribution to shareholders an amount
equal to $100 per Series A Preferred Share before payment is made to the Common
Stock of the Company or any class or series of capital stock of the Company
ranking junior to the Series A Preferred Shares. Except as required by law or
pursuant to the protective provisions described below, the Series A Preferred
Shares have no voting rights. Any dividends payable to holders of the Series A
Preferred Shares shall be paid from funds received by the Company as a
distribution made by the Partnership. The Series A Holders are not entitled to
receive dividends from funds received by the Company from any other source.

F-27

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

Among the
individuals who purchased Series A Preferred Shares in the Offering are (i)
Richard Banakus, the Chairman, interim President and a director of the Company,
who purchased 5,270 shares pursuant to a subscription agreement providing for
payment by the cancellation of two promissory notes representing obligations of
the Company to Mr. Banakus in the original principal amounts of $50,000 and
$40,000 and the payment of $437,000 in cash; (ii) Ronald J. Saul, a
director of the Company who together with his spouse purchased 1,500 shares
pursuant to a subscription agreement providing for payment by the cancellation
of two promissory notes representing obligations of the Company to Mr. Saul and
his spouse in the original principal amounts of $100,000 and $50,000; and (iii)
Karen Gray, a director of the Company who purchased 100 shares pursuant to a
subscription agreement providing for payment of $10,000 in cash.

Note 13. Related Party

On October 3,
2007, the Company, closed on a private offering (the Offering) of 1,400,000
units (Units), Among the individuals who purchased Units in the Offering is
Ronald J. Saul, a director of the Company who together with his spouse
purchased 300,000 Units pursuant to two separate subscription agreements.

On October 30,
2007, the Company, closed on a private offering of 400,000 units (Units),
Ronald J. Saul, a director of the Company, purchased the 400,000 Units together
with his spouse pursuant to a subscription agreement dated October 30, 2007.

On January 23,
2008, the Company, closed on a private offering of 600,000 units (Units),
comprised of one (1) share (Share) of its Common Stock and one (1) warrant
(Warrant) for the purchase of one (1) share of Common Stock. The Company
received gross proceeds of Seventy Five Thousand Dollars ($75,000) from the
sale of Units in the Offering.

Among the
individuals who purchased Units in the Offering is Ronald J. Saul, a director
of the Company who together with his spouse purchased 200,000 Units and Richard
Banakus, the Chairman, interim president and a director of the Company, who
purchased 200,000 units pursuant to a subscription agreement.

On April 9,
2008, the Company borrowed Forty Thousand Dollars ($40,000) (the Loan) from
Richard Banakus, the Chairman, interim President and a director of the Company
(the Lender). In connection with the Loan, the Company issued to the Lender a
promissory note in the principal amount of Forty Thousand Dollars (the Note)
providing for the payment of principal and interest at the rate of five percent
(5%) per annum, in a balloon payment on the earlier of (i) ninety (90) days
from the date of April 9, 2008, or (ii) the date of the closing of a
transaction with net proceeds payable to the Company from any debt or equity
transaction.

F-28

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

On July 30,
2008, Hydron Technologies, Inc., the Company, closed on a private offering (the
Offering) of thirteen thousand (13,000) of its Series A Preferred Shares. The
Company received aggregate gross proceeds of One Million Three Hundred Thousand
Dollars ($1,300,000) from the sale of the Series A Preferred Shares in the
Offering. After issuance of the Series A Preferred Shares sold in the Offering,
the Company has a total of 13,000 Series A Preferred Shares outstanding.

Among the
individuals who purchased Series A Preferred Shares in the Offering are (i) Richard
Banakus, the Chairman, interim President and a director of the Company, who
purchased 5,270 shares pursuant to a subscription agreement providing for
payment by the cancellation of two promissory notes representing obligations of
the Company to Mr. Banakus in the original principal amounts of $50,000 and
$40,000 and the payment of $437,000 in cash; (ii) Ronald J. Saul, a director of
the Company who together with his spouse purchased 1,500 shares pursuant to a
subscription agreement providing for payment by the cancellation of two
promissory notes representing obligations of the Company to Mr. Saul and his
spouse in the original principal amounts of $100,000 and $50,000; and (iii)
Karen Gray, a director of the Company who purchased 100 shares pursuant to a
subscription agreement providing for payment of $10,000 in cash.

Note 14. Managements Plan

As a
consequence of its participation in the Joint Venture, the Companys need for
cash is no longer tied to funding the working capital and other capital requirement
of an operating business. Other than the obligation to pay dividends on the
Series A Preferred Shares to the extent of distributions received from the
Partnership from funds legally available, the Company will only have certain
administrative costs, including legal and accounting costs relating to the
preparation and filing of periodic reports with the Securities and Exchange
Commission. As a result, the Company believes that its current capital balances
will be sufficient to meet its working capital needs for at least the next two
years. Additionally, while the Company has retained certain liabilities, it has
retained sufficient cash to meet them should they become payable and due.

The Companys
working capital was approximately $522,000 at September 30, 2008, including
cash and cash equivalents of approximately $439,000. Cash used by operating
activities was $809,742 and cash used in investing activities was $42,185
during the year ended September 30, 2008. This was offset by proceeds from financing
activities of $1,290,927.

F-29

Hydron Technologies, Inc
Notes to Consolidated Financial Statements 
September 30, 2008 and 2007

Hydron
Continuing Operations

The Companys
continuing operations include:

1.
Its 50%
  investment in the Joint Venture2.
Its ownership
  and licensing of its patented intellectual property3.
Its majority
  ownership of the PartnershipInvestment
in Brand Builders Rx, LLC, a Delaware limited liability company (the Joint
Venture)

The Company
owns a 50% interest in the Joint Venture and under the terms of the Joint
Venture Agreement, will share in 50% of the Joint Venture net profits if
earned. The Companys risk is limited to its original investment.

Licensing
of the Companys Patented Intellectual Property

The Company
continues to own its patented intellectual property (IP) but has licensed its
use according to the terms agreed to in the Joint Venture Agreement. With the
exception of the super-oxygenation technology the licensing is royalty free to
the Joint Venture. The Joint Venture is however responsible to the Company for
any royalties required to be paid by Hydron under the Valera Agreement.

Majority
ownership of Hydron Royalty Partners Ltd., LLLP (the Partnership)

The Company
will continue to serve as General Partner and own the majority ownership
percentage of the Partnership.

Note 15. Subsequent Events.

On November
11, 2008, the Company, entered into certain agreements with Brand Builders
International, LLC, a Delaware limited liability company (Harezi) relating to
a joint venture between the Company and Harezi to be formed as Brand Builders
Rx, LLC, a Delaware limited liability company (the Joint Venture). The Joint
Venture was formed for the purpose of designing, marketing, selling, and
managing certain technologies and products including, but not limited to, those
contributed by the Company.

The terms of
the Joint Ventures business and contractual relationship are governed by the
following agreements, all of which are dated as of October 1, 2008: (i) Capital
Contribution and Joint Venture Agreement (the Contribution Agreement); (ii)
Assignment and Assumption Agreement (the Assignment Agreement); (iii) License
Agreement; (iv) Limited Liability Company Agreement (LLC Agreement); (v)
Buy-Sell Agreement; and (vi) Management Services Agreement (collectively, the
Joint Venture Documents).


F-30

Hydron Technologies, Inc
Notes to Consolidated Financial Statements
September 30, 2008 and 2007

Pursuant to
the Capital Contribution Agreement, the Company has agreed to contribute Two
Hundred Thousand Dollars ($200,000) in cash and assign substantially all of its
assets, other than certain excluded assets provided therein, and license or
sublicense certain rights to the Companys
intellectual property, subject to performance and payment obligations of the
Joint Venture and to the terms of the License Agreement entered into between
the Company and the Joint Venture. The Company assigned such assets to the
Joint Venture pursuant to the Assignment Agreement.

As
contemplated by the Joint Venture Documents and discussed with Harezi, Harezi
will contribute cash, financing, a new headquarters, marketing expertise,
including public relations, filming of television commercials, print media
production and the building of a domestic and international sales force. The
initial value of the Harezi contributions are estimated to be between Five
Hundred Thousand ($500,000) and One Million Dollars ($1,000,000).

Pursuant to
the Companys LLC Agreement, the Company and Harezi each own a fifty percent
(50%) member interest in the Joint Venture. The Joint Venture is controlled by
the board of managers composed of four (4) managers, three of which are
appointed by Harezi and one of which shall be appointed by the Company. The
Company initially appointed Richard Banakus, the Companys Chairman and Interim
President as its initial manager. Certain major decisions will require the
unanimous approval of the Joint Ventures board of managers.

The Management
Services Agreement between the Joint Venture and the Company entitles Harezi to
a management fee in exchange for Harezis marketing, administrative and
management services. The management fee is equal to an additional percent (10%)
of the total amount of distributions made to the members of the Joint Venture,
other than distributions made for the purpose of paying taxes.

The Company
and Harezi entered into a Buy-Sell Agreement providing for restrictions on
transfer of its respective member interests in the Joint Venture, including
right of first refusals, come-along rights and drag-along rights.

Donna Murphy,
age 47, was appointed by the Board on January 9, 2009, to replace David Pollock
who resigned as a Board Member to avoid any potential conflicts of interest
that may occur as a result of Mr. Pollocks significant role in the Joint
Venture.

F-31

EXHIBIT INDEX

INDEX #Consent of
  Independent Registered Public Accounting Firm - Sherb & Co. LLP

23.2Certification
  of Interim President, Principal Financial and Accounting Officer pursuant to
  Section 302 of the Sarbanes-Oxley Act of 2002 and Item 307 of Regulation S-K

31.1Certification
  of Interim President, Principal Financial and Accounting Officer Pursuant to
  18 U.S.C., Section 1350, as Adopted Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002

32.1