**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC  20549**

 

**FORM 20-F**

**(Mark One)**

**o**                                  REGISTRATION STATEMENT PURSUANT TOSECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**OR**

** **

**x**                               ANNUAL REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THEFISCAL YEAR ENDED DECEMBER 31, 2006

 

**OR**

 

**o**                                  TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**OR**

** **

**o**                                  SHELL COMPANYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**Commission File Number:  0-17434**

 

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**DRAXIS HEALTH INC.**

(Exact name of Registrant as specified in its charter)

 

**CANADA**

(Jurisdiction of incorporation or organization)

 

**6870 GOREWAY DRIVE, 2****nd FLOOR,MISSISSAUGA, ONTARIO, CANADA  L4V 1P1**

(Address of principal executive offices)

 

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Securities registered or to beregistered pursuant to Section 12(b) of the Act.
| ** **    | Title of each class         | ** ** | ** ** | **Name of each exchange on which  registered** | ** ** |
|---------------|-----------------------------|------------|------------|------------------------------------------------|------------|
| COMMON SHARES | NASDAQ Global Select Market |
|          | Toronto Stock Exchange      |

 

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Securities registered or to be registered pursuant to Section 12(g) ofthe Act.

 

**NONE**

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section15(d) of the Act.

 

**NONE**

(Title of Class)

 

               Indicate the numberof outstanding shares of each of the issuer’s classes of capital or commonstock as of the close of the period covered by the annual report.

 

**Shares – 41,522,138 common shares (as of 12/31/06)**

 

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

Yes  o   No  x

 

               If this report is anannual or transition report, indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934.

Yes  o   No  x

 

               Note – Checking thebox above will not relieve any registrant required to file reports pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934 from theirobligations under those Sections.

 

               Indicate by check mark whether the Registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one)

Large accelerated filer  o          Accelerated filer  x          Non-accelerated filer  o

 

               Indicate by checkmark which financial statement item the Registrant has elected to follow.

Item17  o     Item18  x

 

               Ifthis is an annual report, indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o   No  x

 

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| PART I        | ** ** | ** **                                                                    | ** ** | ** ** |
|---------------|------------|-------------------------------------------------------------------------------|------------|------------|
| ** **    | ** ** | ** **                                                                    | ** ** | ** ** |
| **ITEM 1.**   | ** ** | **IDENTITY OF  DIRECTORS, SENIOR MANAGEMENT AND ADVISERS**                    | ** ** | **1**      |
| ITEM 2.       |       | OFFER  STATISTICS AND EXPECTED TIMETABLE                                      |       | 1          |
| ITEM  3.      |       | KEY  INFORMATION                                                              |       | 1          |
| ITEM 4.       |       | INFORMATION ON THE  COMPANY                                                   |       | 15         |
| ITEM 4A       |       | UNRESOLVED STAFF  COMMENTS                                                    |       | 52         |
| ITEM 5.       |       | OPERATING AND  FINANCIAL REVIEW AND PROSPECTS                                 |       | 52         |
| ITEM 6.       |       | DIRECTORS,  SENIOR MANAGEMENT AND EMPLOYEES                                   |       | 76         |
| ITEM 7.       |       | MAJOR  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            |       | 100        |
| ITEM 8.       |       | FINANCIAL INFORMATION                                                         |       | 101        |
| ITEM 9.       |       | THE OFFER AND LISTING                                                         |       | 102        |
| ITEM 10.      |       | ADDITIONAL  INFORMATION                                                       |       | 104        |
| ITEM 11.      |       | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   |       | 119        |
| ITEM 12.      |       | DESCRIPTION  OF SECURITIES OTHER THAN EQUITY SECURITIES                       |       | 119        |
|          |       |                                                                          |       |       |
| **PART II**   | ** ** | ** **                                                                    | ** ** | ** ** |
| ** **    | ** ** | ** **                                                                    | ** ** | ** ** |
| ITEM 13.      |       | DEFAULTS,  DIVIDENDS ARREARAGES AND DELINQUENCIES                             |       | 119        |
| ITEM 14.      |       | MATERIAL  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |       | 119        |
| ITEM 15T.     |       | CONTROLS AND  PROCEDURES                                                      |       | 120        |
| ITEM 16A.     |       | AUDIT  COMMITTEE FINANCIAL EXPERT                                             |       | 121        |
| ITEM 16B.     |       | CODE OF  ETHICS AND BUSINESS CONDUCT                                          |       | 121        |
| ITEM 16C.     |       | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                       |       | 121        |
| ITEM 16D.     |       | EXEMPTIONS  FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   |       | 122        |
| ITEM 16E.     |       | PURCHASES OF  EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       |       | 123        |
|          |       |                                                                          |       |       |
| **PART  III** | ** ** | ** **                                                                    | ** ** | ** ** |
| ** **    | ** ** | ** **                                                                    | ** ** | ** ** |
| ITEM 17.      |       | FINANCIAL  STATEMENTS                                                         |       | 125        |
| ITEM 18.      |       | FINANCIAL  STATEMENTS                                                         |       | 125        |
| ITEM  19.     |       | EXHIBITS                                                                      |       | 126        |

 

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**Item 1.    Identity of Directors, Senior Management andAdvisers**

                Not Applicable

**Item 2.    Offer Statistics and Expected Timetable**

                Not Applicable

**Item 3.    Key Information**

                DRAXIS Health Inc. (“DRAXIS” orthe “Company”) is a specialty pharmaceutical company providing products inthree categories: sterile products, non-sterile products andradiopharmaceuticals.  Sterile productsinclude liquid and freeze-dried (lyophilized) injectables and sterileointments.  Non-sterile products areproduced as solid oral, liquid and semi-solid dosage forms.  Radiopharmaceuticals are used for boththerapeutic and diagnostic molecular imaging applications.  In the radiopharmaceutical category, DRAXIShas its own products and a targeted research and development program for newproducts.  As of January 1, 2005, all ofthe operations of the Company are carried out through our wholly ownedsubsidiary DRAXIS Specialty Pharmaceuticals Inc., which operates two majordivisions, DRAXIS Pharma (contract manufacturing) and DRAXIMAGE (radiopharmaceuticals).  Our operations are carried out at our solemanufacturing facilities located at 16751, Trans-Canada Highway, Kirkland,Québec, H9H 4J4, Canada (our “manufacturing facilities” or “facility”).  For the year ended December 31, 2006, 72.8%of our consolidated revenues were derived from DRAXIS Pharma (contractmanufacturing) and 24.2% of our consolidated revenues were derived fromDRAXIMAGE (radiopharmaceuticals).

                Our subsidiary Deprenyl AnimalHealth, Inc. (“DAHI”) receives licensing and royalty revenue related solely to *ANIPRYL®*, a companion animal health product.  It does not engage in any operations.

                Our registered and principaloffice is located at 6870 Goreway Drive, 2nd Floor,Mississauga, Ontario, L4V 1P1, Canada.

                Unless otherwise indicatedherein, the information presented in this Annual Report (Form 20-F) is for theyear ended December 31, 2006.

                The selected data set forth inthe following table are expressed in U.S. dollars and in accordance with U.S.generally accepted accounting principles (“U.S. GAAP”).  All data presented below should be read inconjunction with, and is qualified in its entirety by, reference to our auditedConsolidated Financial Statements and Notes thereto for the year ended December31, 2006 which are included in this annual report.

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** **

**SelectedFive-Year Review**

*(in thousands of U.S. dollars except share relateddata)*

 

 
| ** **                                              | ** ** | **2006**       | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** |
|---------------------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Operations**                                          | ** ** | ** **     |       |       |       |       |       |       |       |       |       |
| Revenues                                                |       |           |       |       |       |       |       |       |       |       |       |
| Product sales                                           | ** ** | **83,545**     |       | 72,989     |       | 61,693     |       | 40,535     |       | 30,338     |       |
| Royalty and licensing                                   | ** ** | **5,422**      |       | 6,444      |       | 7,627      |       | 8,658      |       | 8,302      |       |
|                                                    | ** ** | **88,967**     |       | 79,433     |       | 69,320     |       | 49,193     |       | 38,640     |       |
|                                                    | ** ** | ** **     |       |       |       |       |       |       |       |       |       |
| Operating income                                        | ** ** | **14,952**     |       | 9,764      |       | 9,856      |       | 6,686      |       | 2,894      |       |
|                                                    | ** ** | ** **     |       |       |       |       |       |       |       |       |       |
| Income from continuing  operations                      | ** ** | **11,547**     |       | 7,784      |       | 7,977      |       | 4,671      |       | 3,020      |       |
| (Loss) income from  discontinued operations, net of tax | ** ** | **—**     |       | —     |       | (61        | )          | 8,531      |       | (834       | )          |
| Net income                                              | ** ** | **11,547**     |       | 7,784      |       | 7,916      |       | 13,202     |       | 2,186      |       |
|                                                    | ** ** | ** **     |       |       |       |       |       |       |       |       |       |
| Basic income (loss) per  share                          | ** ** | ** **     |       |       |       |       |       |       |       |       |       |
|  - From continuing operations                      | ** ** | **$**          | **0.28**   |       | $          | 0.19       |       | $          | 0.20       |       | $          | 0.13 |   | $ | 0.08 |   |
|  - From discontinued operations                    | ** ** | **—**     |       | —     |       | —     |       | 0.23       |       | (0.02      | )          |
|                                                    | ** ** | **$**          | **0.28**   |       | $          | 0.19       |       | $          | 0.20       |       | $          | 0.36 |   | $ | 0.06 |   |
|                                                    |       |           |       |       |       |       |       |       |       |       |       |
| Diluted income (loss)  per share                        | ** ** | ** **     |       |       |       |       |       |       |       |       |       |
|  - From continuing operations                      | ** ** | **$**          | **0.28**   |       | $          | 0.18       |       | $          | 0.19       |       | $          | 0.13 |   | $ | 0.08 |   |
|  - From discontinued operations                    | ** ** | **—**     |       | —     |       | —     |       | 0.23       |       | (0.02      | )          |
|                                                    | ** ** | **$**          | **0.28**   |       | $          | 0.18       |       | $          | 0.19       |       | $          | 0.36 |   | $ | 0.06 |   |
|                                                    |       |           |       |       |       |       |       |       |       |       |       |
| **Financial Position at December  31**                  |       |           |       |       |       |       |       |       |       |       |       |
| Cash and cash  equivalents                              | ** ** | **21,446**     |       | 12,390     |       | 5,926      |       | 10,563     |       | 4,899      |       |
| Total assets                                            | ** ** | **105,962**    |       | 95,820     |       | 88,785     |       | 76,553     |       | 67,951     |       |
| Long-term debt                                          | ** ** | **—**     |       | —     |       | —     |       | 10,466     |       | 12,726     |       |
| Common shareholders’  equity                       | ** ** | **92,415**     |       | 81,628     |       | 69,920     |       | 41,647     |       | 20,227     |       |
| Book value per common  share                            | ** ** | **2.23**       |       | 1.96       |       | 1.70       |       | 1.12       |       | 0.55       |       |
|                                                    | ** ** | ** **     |       |       |       |       |       |       |       |       |       |
| **Share Information**                                   | ** ** | ** **     |       |       |       |       |       |       |       |       |       |
| Number of shares  outstanding at end of year            | ** ** | **41,522,138** |       | 41,588,005 |       | 41,015,326 |       | 37,297,817 |       | 37,098,690 |       |
| Weighted-average number  of shares - basic              | ** ** | **41,592,507** |       | 41,471,798 |       | 39,886,219 |       | 37,114,648 |       | 36,981,985 |       |
| Weighted-average number of shares - diluted             | ** ** | **41,675,682** |       | 42,365,782 |       | 41,054,883 |       | 37,194,994 |       | 37,337,879 |       |

 

### **Overview**

                This Annual Report (Form 20-F)contains forward-looking statements (within the meaning of the Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended) and information that are based on management’sbeliefs, as well as assumptions made by and information currently available tomanagement.  When used in this AnnualReport (Form 20-F), the words “anticipate,” “estimate,” “forecast”, “plan”, “believe,”“expect,” “potential,” “intend,” “projected” “designed” and “should” andsimilar expressions are intended to identify forward-looking 

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statements.  These forward-looking statements necessarilymake numerous assumptions with respect to: industry performance; generalbusiness, economic and regulatory conditions; access to markets and materials;and other matters, all of which are inherently subject to significantuncertainties and contingencies and many of which are beyond our control.  Should one or more of these risks oruncertainties materialize, or should underlying assumptions made or factorsconsidered in making a forward looking statement prove incorrect, actualresults may vary materially from those anticipated, estimated orprojected.  We believe that any of thefollowing risk factors could cause our actual results to differ from those thatmay have been or may be projected in forward-looking statements made by us oron our behalf from time to time.  Theforward-looking statements in this Annual Report (Form 20-F) are contained principallyunder Items 4 and 5.

**RISKFACTORS**

                Our future financial condition,results of operations and business could be materially affected by the risksand uncertainties discussed below, or otherwise, and historic trends should notbe used to anticipate results or trends in future periods:

***                RisksRelated to our Industry***

                WE MAY NOT BE ABLE TO GET TIMELYREGULATORY APPROVAL FOR OUR PRODUCTS AND WE MUST COMPLY WITH REGULATORYREQUIREMENTS TO MANUFACTURE AND MARKET OUR PRODUCTS.

                The manufacturing and marketingof our existing and potential products, as well as preclinical studies andclinical trials, are subject to extensive regulation and approval by theTherapeutic Products Directorate (“TPD”) of the Health Products and Food BranchInspectorate of Health Canada (“HPFBI”) and other authorities in Canada and bynumerous federal, state and local government authorities in the United States,including the Food and Drug Administration (“FDA”). Similar regulatoryrequirements exist in Europe and other countries.  To the extent we choose to distribute ourproducts in foreign markets, we may rely on licensees to obtain regulatoryapprovals in such countries.  Any failureor delay by us, our collaborators or licensees to comply with applicablerequirements or obtain regulatory approvals for our products could adverselyaffect the marketing of products developed or licensed by us and our ability toreceive product or royalty revenue.

                As of December 31, 2006, DRAXIMAGE had fiveregulatory submissions filed with European regulatory authorities: four withthe Medicines Evaluation Board in the Netherlands and one with the DanishMedicines Agency.  The submission datesfor these radiopharmaceutical products range from June 2003 to December2004.  All of the approvals sought byDRAXIMAGE in Europe are for marketing authorizations through the mutualrecognition procedure, which involves obtaining approval in one state (the “referencemember state”) and recognition of that approval in other member states.  All of the approvals being sought byDRAXIMAGE in Europe are for radiopharmaceutical products already approved inCanada or the U.S.  Two of these fiveEuropean submissions were for DRAXIMAGE’s kit for the Preparation of TechnetiumTc-99m Albumin Aggregated Injection (MAA Kit) for which DRAXIMAGE receivedapproval in one reference member state, the Netherlands, in February 2005 andfor the Preparation of Technetium Tc-99m MethyleneDiphosphonic Acid Injection(MDP Kit) for which DRAXIMAGE received approval in one reference member state,the Netherlands, in March 2006.

                The regulatory process forinnovative products generally involves preclinical studies and clinical trialsof each compound to establish its safety and efficacy, takes many years andrequires the expenditure of substantial resources.  For generic products, the regulatory processdoes not typically involve clinical studies. Moreover, if regulatory approval of a drug or diagnostic product isgranted, such 

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approval may entaillimitations on the indicated uses for which it may be marketed.  Our failure to comply with applicableregulatory requirements can, among other things, result in the suspension ofour regulatory approvals, product recalls, seizure of products, operating restrictionsand criminal prosecution.  Further,government policy may change and additional government regulations may beestablished that could prevent or delay regulatory approvals for ourproducts.  In addition, a marketed drugand its manufacturer are subject to continual review.  Later discovery of previously unknownproblems with the product or manufacturer may result in restrictions on suchproduct or manufacturer, including withdrawal of the product from the market.

                On February 2, 2007, DRAXIMAGEannounced it had submitted an Abbreviated New Drug Application (“ANDA”) to theFDA for its generic kit for the preparation of Tc-99m Sestamibi for injection(DRAXIMAGEÒ Sestamibi), anuclear medicine imaging agent used in myocardial perfusion imaging (“MPI”) toevaluate blood flow to the heart in patients undergoing cardiac tests.

                DRAXIMAGE manufactures approximately 65% of theactive pharmaceutical ingredients that are used in the radiopharmaceuticalproducts it manufactures.  The finalproducts in which the active pharmaceutical ingredients are used are subject toregulation for safety and efficacy by the FDA, TPD and regulatory authoritiesin other jurisdictions, as the case may be. All of the final products that DRAXIMAGE or DRAXIS Pharma manufacturesmust be approved by the FDA, TPD and the regulatory authorities in otherjurisdictions, as the case may be, before they can be commerciallymarketed.  The process of obtainingregulatory clearance for marketing is uncertain, costly and time-consuming.  We cannot predict how long the necessary regulatoryapprovals will take or whether we or our customers for whom we manufactureproducts will ever obtain such approval for products.  To the extent that we and/or our customers donot obtain the necessary regulatory approvals for marketing new products, ourproduct sales could be adversely affected.

                All products manufactured by us(including those manufactured for our contract manufacturing customers) have tocomply with the current Good Manufacturing Practices (“cGMP”) imposed under thelaws of the U.S., Canada and other jurisdictions, as well as the guidelines andpolicies of TPD, FDA and the regulatory authorities in other jurisdictions, asthe case may be.  In addition, productscontaining radioactive isotopes will have to comply with the guidelines andregulations of the Canadian Nuclear Safety Commission in Canada and the UnitedStates Nuclear Regulatory Commission and other similar regulations in othercountries.** **Compliance with cGMP regulations requires us to expend time,money and effort on our production facilities and to maintain precise andextensive records and quality control to ensure that our products meetapplicable specifications and other requirements. The FDA, TPD and otherregulators may periodically inspect our drug manufacturing facilities to ensurecompliance with applicable cGMP requirements. In addition, our customers also periodically inspect our manufacturingfacilities to ascertain compliance with cGMP requirements.  If we fail to comply with the cGMPrequirements, we may become subject to possible regulatory action, andmanufacturing at the facility could consequently be suspended, causing possibleloss of profit, regulatory fines and third-party liability.  To date we have not been subject to anynotice of material non-compliance.

                The FDA, TPD or other regulatoryauthorities may also require us to submit specific batches or lots of aparticular product for inspection. If the product lot fails to meet applicablerequirements, then the following actions might be taken: (i) restrict therelease of the product; (ii) suspend manufacturing of the specific product lot;(iii) order a recall of the product lot; or (iv) order a seizure of the productlot.

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                WE MAY NOT BE ABLE TO OBTAIN AND ENFORCE EFFECTIVEPATENTS TO PROTECT OUR PROPRIETARY RIGHTS FROM USE BY COMPETITORS, AND THEPATENTS OF OTHER PARTIES COULD REQUIRE US TO STOP USING OR TO ACQUIRE A LICENSEFOR CONDUCTING CERTAIN BUSINESS ACTIVITIES, AND OUR COMPETITIVE POSITION ANDPROFITABILITY COULD SUFFER AS A RESULT.

                Our success depends, in part, onour ability to obtain, enforce and maintain patent protection for ourradiopharmaceutical and *ANIPRYL*®technologies in Canada, the United States and other countries.  Patents for our radiopharmaceuticaltechnologies have expiry dates ranging from November 2008 to December2021.  Patents issued to our subsidiaryDAHI for our *ANIPRYL*® technology,have expiry dates ranging from August 2010 to June 2016.  We cannot assure you that patents will beissued from any pending applications or that claims now or in the future, ifany, allowed under issued patents will be sufficiently broad to protect ourtechnology. In addition, we cannot assure you that any patents issued to orlicensed by us will not be challenged, invalidated, infringed or circumvented,or that the rights granted under these patents will provide continuingcompetitive advantages to us.  The patentpositions of pharmaceutical and biotechnology firms, including ours, aregenerally uncertain and involve complex legal and factual questions.  In addition, we do not know whether any ofour current research endeavors will result in the issuance of patents inCanada, the United States or elsewhere, or if any patents already issued willprovide significant proprietary protection or will be circumvented orinvalidated.  Since patent applicationsin the United States and Canada are maintained in secrecy for at least 18months from the date of filing, and since publication of discoveries in thescientific or patent literature tends to lag behind actual discoveries byseveral months, we cannot be certain that we will be the first to createinventions claimed by pending patent applications or that we will be the firstto file patent applications for such inventions.  Our failure to obtain patents for ourproducts could negatively affect our competitive position.

                Our commercial success alsodepends in part on our not infringing patents or proprietary rights of othersand not breaching the licenses granted to us. In the event that we are found to have infringed other parties’ patents,licenses may not be available to us on terms that are commercially favorable orat all.  In addition, the degree ofpatent protection afforded to pharmaceutical or biotechnological inventionsaround the world is uncertain and varies significantly among differentcountries.  There can be no assurancethat we will be able to license third-party technology or patents that we mayrequire to conduct our business or that such technology or patents can belicensed at a reasonable cost. Failure by us or our collaborators or customersto license any technology or patents that we may need to commercialize ourtechnologies or manufacture our products may result in delays in marketing ourproducts or may impede our inability to proceed with the development,manufacture or sale of products requiring such licenses.

                We may be required to engage inlitigation and other patent proceedings to enforce patents issued to us, todefend our right, title and interest in patents related to our products and todetermine the scope and validity of other parties proprietary rights.  These proceedings can be costly, and if theoutcome of any such proceedings is adverse to us, we could lose the right tosell some of our products or could be required to pay damages, which may besubstantial.

                We also rely on unpatented tradesecrets, improvements and know-how with respect to our contract manufacturingoperations and all of our operations associated with our radiopharmaceuticalkit business to develop and maintain our competitive position, which we seek toprotect, in part, by confidentiality agreements with our customers,collaborators, employees and consultants. These agreements could be breached, and we may not have adequateremedies for any breach. Further, our trade secrets could otherwise becomeknown or be independently discovered by our competitors.

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                ALTHOUGH WE CARRY PRODUCTLIABILITY INSURANCE, A SUCCESSFUL LIABILITY CLAIM COULD NEGATIVELY IMPACT OURBUSINESS.

                We may be subject to liability claims by those whopurchase our contract manufacturing services, for the use of any of ourproducts under clinical development and the sale and use of any of our approvedproducts.  Such claims may be madedirectly by customers, consumers, healthcare providers or pharmaceuticalcompanies or others selling such products. Although we believe that our insurance coverage is reasonably adequateto insulate us from potential product liability claims and we have nothistorically experienced any problems associated with claims by those whopurchase our contract manufacturing services or users of our products underclinical development or that we manufacture, we cannot provide any assurancethat we will be able to maintain insurance coverage at a reasonable cost or insufficient amounts to protect us against losses due to this potentialliability.  We may not be able tomaintain or obtain additional commercially reasonable product liabilityinsurance for any products approved for marketing and sale.  Even unsuccessful product liability claimscould result in the expenditure of funds in litigation and the diversion ofmanagement time and resources and could damage our reputation and impair themarketability of our products, which could have a material adverse effect on ourfinancial condition and results of operation.

                On July 22, 2005, we announced that, together withother defendants, we had received a Statement of Claim filed before theSuperior Court of Justice of Ontario alleging that PermaxÒ, a drug that we distributed in Canada for a third party manufacturerprior to July 2003, causes “compulsive/obsessive behaviour, includingpathological gambling”.  The plaintiff isseeking to have this action certified as a class action.  We believe this claim against us is withoutmerit and we intend to vigorously defend this proceeding and any motion forcertification.  Prior to July 2003,PermaxÒ wasdistributed in Canada by DRAXIS Pharmaceutica, our Canadian pharmaceuticalsales and marketing division.  In July2003, we sold the DRAXIS Pharmaceutica division to Shire BioChem Inc. (“Shire”).  As of December 31, 2006, there have been nodevelopments in this action.

                IF THE MARKET DOES NOT ACCEPTOUR PRODUCTS CURRENTLY IN DEVELOPMENT, OUR BUSINESS COULD BE HARMED.

                There can be no assurance thatany of our products currently in development or our recently approved productswill achieve market acceptance.  Thedegree of market acceptance will depend upon a number of factors, including thereceipt of regulatory approvals (generic and innovative products), theestablishment and demonstration in the medical community of the clinicalefficacy and safety of our products (innovative products), the establishmentand demonstration of their potential advantages to existing and new diagnostic andtreatment methods and the reimbursement policies of government and third-partypayers and, most importantly, the launching of competing products by ourcompetitors that become established prior to the launch of our products indevelopment. There can be no assurance that physicians, patients, payers or themedical community in general will accept and utilize any existing or futureproducts.

                We anticipate that we will face increased competitionin the future as new products enter the market and advanced technologies becomeavailable.  There can be no assurancethat existing products or new products developed by our competitors will not bemore effective, or be more effectively marketed and sold, than any of the productsthat may be developed, manufactured or sold by us.  Competitive products may render our productsobsolete and uncompetitive prior to recovering our research, development orcommercialization expenses incurred with respect to any such products.

For example, in a press release dated March 27, 2006, we announced thatalthough our product *FIBRIMAGE**Ò* had met primaryend points in its Phase III clinical trial in Canada, further market 

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analysis had shown that new technologies had successfully captured thecurrent deep venous thrombosis indications and there was no longer aneconomically interesting market opportunity at this time in either the at-riskasymptomatic patient, or those with symptoms. We further indicated that we had decided that no significant furtherwork would be conducted in the development of this product for its currentindications but that other potential opportunities for this product would beexplored.  In 2006, no other potentialopportunities were uncovered.

We currently have other products in development such as INFECTONÒ, TechnetiumGenerators and DRAXIMAGEÒ I-131 MIBG that could beexposed to this risk.

With respect to our radiopharmaceutical operations, we believe that theonly radiopharmaceutical imaging products on the market at this time which maycompete with DRAXIMAGE’s *INFECTON®*product under clinical development is LeukoScan®.  Immunomedics, Inc. (NASDAQ: IMMU) announcedin January 2005 that it received Health Canada approval for the marketing anduse of LeukoScan® for the detection of osteomyelitis.  However, according to Immunomedics, Inc.’swebsite, the product is not presently sold in Canada.  LeukoScan® is a murine monoclonal IgGantibody fab’ fragment labeled with Tc-99m. We believe that *INFECTON®* wouldoffer a more convenient alternative to white blood cell labelling currentlyused which uses a process of removing blood from a patient, isolating whiteblood cells in the patient’s blood, radiolabelling the white blood cells withan isotope such as Indium-111 or Technetium coupled with a carrier molecule andreinjecting the white blood cells into the patient.  *INFECTON®* is aradiolabeled imaging agent which is injected directly into the patient withoutthe complexities associated with labelling the patient’s own white cells.

We also believe that AZEDRAÔ, being developed by Molecular InsightPharmaceuticals, Inc. (“MIPI”) may compete with our DRAXIMAGEÒ I-131 MIBG product under clinical development.  AZEDRAÔ has received Orphan Drug status and a FastTrack designation by the FDA.  Accordingto information set forth in its website, MIPI is conducting a Phase I clinicaltrial with AZEDRAÔ in adults at Duke University.  The initial target market for AZEDRAÔ is the treatment of metastatic neuroendocrine tumours such aspheochromocytoma, carcinoid and neuroblastoma that are not amenable totreatment with surgery or conventional chemotherapy.  Metastatic tumours are tumours that spread toother organs or parts of the body.

With respect to our licensedtechnology, no significant competition for *ANIPRYL*® hasbeen experienced to date in Canada or the United States from products approvedfor veterinary or human use.  However,there are other treatments available that have not been approved in Canada orthe United States to treat canine Cushing’s disease, but which we believe maybe being used off-label for canine Cushing’s disease: *LYSODREN®* (mitotane) by Bristol-MyersSquibb Co. (NYSE: BMY), which was approved for use in the treatment of humaninoperable cancer of the adrenal gland, and *NIZORAL®*(ketoconazote) tablets by Johnson & Johnson, Inc., an anti-fungalmedication, which was approved for the treatment of various internal andexternal fungal and yeast infections in humans. We believe that human use selegiline used for the treatment of Parkinson’sdisease, although not approved for veterinary use, may also compete with theuse of *ANIPRYL*® in dogs.

WE DO NOT HAVE THE SAME AMOUNT OF RESOURCES ASSOME OF OUR COMPETITORS.

Many ofour existing or potential competitors, particularly large pharmaceuticalcompanies, have substantially greater financial, technical and human resourcesthan we do. In addition, many of these competitors have significantly greater experience in undertaking research,preclinical studies and human clinical trials of new pharmaceutical products,obtaining regulatory approvals, 

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manufacturingand marketing such products. Accordingly, our competitors may succeed in commercializing ormanufacturing products more rapidly or effectively than we can.

WEOPERATE IN A VERY COMPETITIVE MARKET.

DRAXISPharma, our contracting manufacturing division, competes with pharmaceuticalcompanies that have in-house manufacturing capabilities as well as withthird-party contract manufacturers, including Hospira Inc., BoehringerIngelheim, Cardinal Health, Inc., DPT Laboratories, Haupt Pharma AG, PatheonInc., Hollister-Stier Laboratories LLC and DSM Pharmaceuticals, Inc.

DRAXIMAGE,our radiopharmaceuticals division, competes with the following companies thathave significant radiopharmaceutical operations: Bristol-Myers Squibb Company, GEHealthcare, Mallinckrodt Inc., a division of Tyco Healthcare, CISBio, andBracco SpA.  In addition, there are anumber of companies that are developing and/or marketing otherradiopharmaceutical products, including MDS Nordion Inc., Immunomedics, Inc.,Cytogen Corporation, Biogen Idec Inc. and Molecular Insight Pharmaceuticals,Inc.

FAILUREOF ONE OF OUR CURRENT OR FUTURE CLINICAL TRIALS COULD HAVE A MATERIALLYNEGATIVE IMPACT ON OUR FUTURE PROSPECTS.

Thedevelopment of new products is subject to a number of significant risks.  Potential products that appear to bepromising in various stages of development may not reach the market for anumber of reasons.  Such reasons include,but are not limited to, the possibility that the potential product will befound ineffective or unduly toxic during preclinical or clinical trials, failsto receive necessary regulatory approvals, will be difficult to manufacture ona large scale, will be uneconomical to market or not achieve marketacceptance, will not qualify for third-party reimbursement, or will beprecluded from commercialization by proprietary rights of third parties.  Certain products we are attempting to develophave never been manufactured on a commercial scale, and there can be noassurance that such products can be manufactured at a cost or in a quantity torender such products commercially viable. Production of such products may require the development of newmanufacturing technologies and expertise. The impact on our business in the event that new manufacturingtechnologies and expertise would have to be developed is uncertain.  Many of our potential products will requiresignificant additional research and development efforts and significantadditional preclinical and clinical testing prior to any commercial use.  We cannot assure you that we willsuccessfully meet any of these technological challenges or others that mayarise in the course of product development.

Beforeobtaining regulatory approval for the commercial sale of any innovative productunder development, we must demonstrate through preclinical studies and clinicaltrials that the product is safe and efficacious.  In November 2006, we announced that DRAXIMAGEhad received approval from the FDA to run two clinical trials using radioactiveIobenguane I-131 Injection (also known as I-131 MIBG) to treat high-risk neuroblastoma, a rareform of cancer that affects mostly infants and young children, one trial is aPhase II study and another is a Phase I study. As of December 31, 2006, our *INFECTON**Ò* product had completed threePhase II trials in Canada, and the U.S. A fourth Phase II trial was discontinued due to a change of marketfocus.  An expert panel, comprised of respectednuclear medicine specialists and microbiologists, was assembled and this expertpanel reviewed the preliminary scientific and clinical data together with theoutcome of the market research studies. The role of the expert panel was to assess the results to date, reviewpotential target markets, and advise DRAXIMAGE on the design of future clinicalstudies and appropriate indications.  Thepreliminary report of the expert panel recommended that the product bereformulated for orthopaedic-related indications and the assessment of suchformulations is under way.  The resultsof preclinical studies and early-stage clinical trials may not be totallypredictive of results obtained in larger late-stage clinical trials, and therecan be 

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no assurancethat our clinical trials will demonstrate safety and efficacy, achieve regulatoryapprovals or result in marketable products. A number of companies in the biotechnology and pharmaceutical industryhave suffered significant setbacks in advanced clinical trials, even afterachieving promising results in earlier clinical trials.

OUR PROFITDEPENDS IN PART ON REIMBURSEMENT POLICIES AND REGULATIONS OF GOVERNMENTHEALTH ADMINISTRATION AUTHORITIES, PRIVATE HEALTH INSURERS AND OTHERORGANIZATIONS.

The business and financial condition ofpharmaceutical companies will continue to be affected by the efforts ofgovernments and third-party payers to contain or reduce the costs of healthcarethrough various means.  For example, incertain markets, pricing or profitability of pharmaceutical products, medical devicesand diagnostic products is subject to government control.  In Canada, the Patented Medicine PricesReview Board (“PMPRB”) monitors and controls prices of patented drug products marketed in Canada.  The PMPRB may assert jurisdiction over ourproducts under development which may limit the prices that can be charged forsuch products in Canada.  We may not beable to obtain prices for our products under development that will make themcommercially viable exclusively in Canada. In the United States there have been, and we expect that there willcontinue to be, a number of federal and state proposals to implement similarpricing controls by government.  Inaddition, the emphasis on managed healthcare in the United States has increasedand will continue to increase the pressure on pharmaceutical pricing.  While we cannot predict whether suchlegislative or regulatory proposals will be adopted or the effects suchproposals or managed healthcare efforts may have on our business, theannouncement of such proposals or efforts could have a material adverse effecton the market price of our securities and, if adopted, on our business andfinancial condition and that of our current and prospective customers.  Accordingly, our ability to establishstrategic alliances may be adversely affected. In addition, in Canada, the United States and elsewhere, sales ofprescription pharmaceutical products and radiopharmaceutical products aredependent, in part, on the availability of reimbursement to the consumer fromthird-party payers, such as government and private insurance plans.  Third-party payers are increasinglychallenging the prices charged for medical products and services.  To the extent we succeed in bringing newproducts to market, we cannot assure you that these products will be consideredcost-effective and that reimbursement to consumers will be available or will besufficient to allow the sale of these products on a competitive basis.

***                RisksRelated to our Company***

WE ONLY HAVE ONE MANUFACTURING FACILITY ANDFACTORS BEYOND OUR CONTROL COULD CAUSE AN INTERRUPTION IN OUR MANUFACTURING OPERATIONS, WHICH WOULD ADVERSELY AFFECT OURREPUTATION IN THE MARKETPLACE AND OUR RESULTS OF OPERATIONS.

All ofour manufacturing facilities are located in the same location in Kirkland,Québec.  To succeed, we must be able tooperate our manufacturing facilities without significant interruption and deliverradiopharmaceutical and contract manufacturing products in a timely manner. Wecould suffer an interruption in our manufacturing operations caused by damagefrom a variety of sources, many of which are not within our control, includingfire, flood, earthquake and other natural disasters; power loss andtelecommunication failure; disruption to transportation systems; majorequipment or machinery failure; software and hardware errors, failures orcrashes and similar disruptions; or undue delays or restrictions with airtransport systems and cross-border shipments. Any significant interruptions inour manufacturing operations or our ability to deliver time-sensitive productswould damage our reputation in the marketplace and have a negative impact onour results of operations.  For example,during the third quarter of 2005, DRAXIS Pharma, our contract manufacturingoperating division, extended its regularly 

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scheduledsummer shutdown period at the beginning of the third quarter in the sterilearea of our manufacturing facility, in order to correct an electrical panelfailure and make associated repairs.  Therevalidation of the entire sterile area following these repairs and the relatedrecalibration of production schedules due to this interruption had materialfinancial implications which negatively affected third and fourth quarter 2005results.  As a further example, if therewere a cessation of flights leaving Canada for the U.S., then theradiopharmaceutical products manufactured by DRAXIMAGE, which are delivered inpart via airplanes, could not be delivered to customers on a timely basis andour products would be harmed due to their short shelf-life.  Also, if there were a prolonged loss ofhydroelectric power at our sole manufacturing facility, then the manufacturingof our products may be impaired because we may not have sufficient back-upelectrical power from independent generators for the duration of thehydroelectric interruption.  Although webelieve that we carry adequate property and business interruption insurance, wecannot assure you that we will be able to maintain such insurance coverage at areasonable cost or in sufficient amounts to protect us against all potentialeventualities.

IF OURCOLLABORATIVE AND COMMERCIAL RELATIONSHIPS WITH THIRD PARTIES ON WHOM WE RELYARE UNSUCCESSFUL, OUR BUSINESS MAY SUFFER.

To be successful, we must continually establishand maintain strategic or key relationships with other companies ororganizations in a number of biotechnology and pharmaceutical industrysegments.  This is critical to oursuccess because such relationships enable us to extend the reach of ourproducts and sales in various jurisdictions, generate additional revenue anddevelop and deploy new products in various marketplaces.  Entering into strategic relationships iscomplicated, as some of our current and future strategic partners may decide tocompete with us in some or all of the markets in which we operate or refuse tofulfill or honor their contractual obligations to us.  In addition, our relationships with customersalways require us to manufacture products in accordance with theirspecifications that are issued to us from time to time.  If we are unable to meet our customers’specifications, our strategic relationships would be harmed.  We currently have strategic relationshipswith our three largest customers (i) Genzyme Corporation (“Genzyme”) tomanufacture Hectorol® Injection, (ii) GlaxoSmithKline Inc. (“GSK”) to supply itwith established sterile products marketed by GSK in multiple internationalmarkets and a prescription sterile injectable product for the U.S. market, and(iii) Johnson & Johnson, Inc. (“J&J”) (prior to December 20, 2006,Pfizer Consumer Healthcare, a division of Pfizer Canada, Inc.), that coversseveral non-prescription products for the Canadian market, includingPolysporin®, Sudafed®, Actifed® and Zincofax®. We also have a key relationship with Cardinal Health 414, Inc. withrespect to our Iodine I-131 kits, MAA, DTPA and MDP products sold in the U.S.

A SIGNIFICANT PORTION OF OUR BUSINESS ISDEPENDENT ON A SMALL NUMBER OF KEY CUSTOMERS.

For the year ended December 31, 2006, our three largest customers,Genzyme, GSK and J&J (prior to December 20, 2006, Pfizer ConsumerHealthcare, a division of Pfizer Canada, Inc.), represented 56% of ourconsolidated revenues (23%, 23% and 10% respectively). The termination by anyof these customers of its relationship with us would have a material adverseeffect on our business, financial condition and results of operations unless wecould replace these customers in a timely fashion.

IF OUR COLLABORATORS, EMPLOYEES, OR CONSULTANTS DISCLOSE OURCONFIDENTIAL INFORMATION TO OTHERS DESPITE CONFIDENTIALITY AGREEMENTS IN PLACE,OUR BUSINESS MAY SUFFER.

Our practice is to require our employees, collaborators, consultants andoutside scientific advisors to execute confidentiality agreements upon the commencement of employment or consultingrelationships.  These agreements providethat all confidential information developed or made known to 

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the individualduring the course of the individual’s relationship with us is to be keptconfidential and not disclosed to third parties, subject to certain specificlimited exceptions.  In the case ofemployees, the agreements provide that all inventions conceived by theindividual shall be our exclusive property. These agreements, however, may not provide meaningful protection for ourtrade secrets or adequate remedies in the event of unauthorized use ordisclosure of such information.  Forexample, trade secrets regarding the recipe to manufacture one of ourradiopharmaceutical kit or capsule products could be disclosed, allowing our competitorsto copy the recipe and manufacture a competing product.

WE ARESUBJECT TO REGULATION BY GOVERNMENTS IN MANY JURISDICTIONS AND, IF WE DO NOTCOMPLY WITH MANUFACTURING, NUCLEAR SAFETY AND ENVIRONMENTAL REGULATIONS, OUREXISTING AND FUTURE OPERATIONS MAY BE CURTAILED, AND WE COULD BE SUBJECT TOLIABILITY.

Pharmaceuticaldrug manufacturing is a highly regulated industry, requiring significantdocumentation and validation of manufacturing processes and quality controlassurance prior to approval of the facility to manufacture a specific drug.  There can be considerable transition timebetween the initiation of a contract to manufacture a product and the actualinitiation of manufacture of that product. Any lag time in the initiation of a contract to manufacture a productand the actual initiation of the manufacturing at our facilities could cause usto lose profits.

We have in placefacilities and procedures designed to reduce and, to the extent possible,eliminate the risk of environmental contamination resulting from the processingof raw materials and, more specifically, from the radiopharmaceutical businessof DRAXIMAGE and the contract manufacturing business of DRAXIS Pharma.  We also have in place regular maintenanceprograms to ensure continued compliance with all applicable health and safety,environmental and nuclear safety regulations. We believe that the operations at our manufacturing facilities comply inall material respects with applicable health and safety, environmental andnuclear safety laws.  As of December 31,2006, we have not received any notice stating that we are not in compliancewith any such legislation applicable to us.

Canadianand U.S. federal, state, local and provincial regulations govern extensivelythe use, manufacture, storage, handling, transport and disposal of hazardousmaterial and associated waste products. Although we believe that the operations at our facilities comply in allmaterial respects with applicable laws, we cannot completely eliminate the riskof substantial environmental liabilities especially in respect of environmentalcontamination resulting from the processing of raw materials from theradiopharmaceutical business of DRAXIMAGE and the manufacturing business ofDRAXIS Pharma.  Any failure by us or anyof our subsidiaries to comply with such present or future laws could result inany of the following: (i) cessation of portions or all of our or oursubsidiaries’ operations; (ii) imposition of fines; (iii) restrictions on ouror our subsidiaries’ ability to carry on or expand our operations; (iv)significant expenditures by us in order to comply with laws and regulations; or(v) liabilities in excess of our resources.

OURBUSINESS COULD BE HARMED IF THERE WERE A DISPUTE OR DISRUPTION WITH OURUNIONIZED EMPLOYEES.

The products manufactured by DRAXIS Pharmarepresent a significant amount of our consolidated revenues.  For the year ended December 31, 2006, 72.8% of our consolidated revenues were derived fromDRAXIS Pharma.  Although a collectiveagreement with a five-year term to April 30, 2008 between DRAXIS Pharma and theUnited Food & Commercial Workers International Union, Local 291 (AFL-CIO) was ratified in February 2004, we cannotassure you that future labor difficulties will not arise, and if they did arisethen the production and delivery of those products manufactured by DRAXIS 

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Pharma would be impaired for the duration of thoselabor difficulties and those products manufactured by DRAXIMAGE may also beimpaired if access to our sole manufacturing facilities is hindered by theselabor difficulties.

OURFUTURE SUCCESS DEPENDS ON OUR ABILITY TO GROW, AND IF WE ARE UNABLE TO MANAGEOUR GROWTH EFFECTIVELY, WE MAY INCUR UNEXPECTED EXPENSES AND BE UNABLE TO MEETOUR CUSTOMERS’REQUIREMENTS.

We will need to maintain, expand and upgrade our manufacturingfacilities and operations to execute current commercial obligations tocustomers, widen our customer base and increase manufacturing efficiencies overthe next few years.  We cannot be certainthat DRAXIS Pharma will be able to enter into enough lucrative third-partymanufacturing contracts to increase its profitability.  If we do secure advantageous agreements, wecannot be certain that our employees, systems, procedures, controls, productivecapacity and existing space will be adequate to support expansion of theoperations.  Our future operating results will depend on theability of our officers and key employees to manage changing businessconditions and to implement and improve our technical, administrative,financial control and reporting systems and operational excellence in order toachieve established business objectives. An unexpectedly large increase in the volume of manufacturing businessor the number of orders placed by customers may require us to expand capacityand further upgrade our manufacturing facilities and the technology related toour manufacturing.  We may not be able toproject the rate of timing of such increases or customer demands accurately orto expand and upgrade our manufacturing facilities and supporting systems andinfrastructure to accommodate such increases. Difficulties in managing future growth and meeting customers’ expandedrequirements could have a significant negative impact on our business and itsprofitability.

OUR FINANCIAL RESULTS MAY FLUCTUATE, AND OUR FUTUREREVENUE AND PROFITABILITY ARE UNCERTAIN.

Our ability to achieve and maintain profitability in the foreseeablefuture depends on the commercial success of our products and services.  Because we have recently launched newproducts in new markets such as our Sodium I-131 Capsules USP, Diagnostic Oralin the U.S., revenues are difficult to predict and may fluctuate substantiallyfrom period to period.  In addition,product development programs will require substantial additional investment,including the cost of clinical trials for innovative products (such as thecosts of our clinical trials for DRAXIMAGEÒ I-131 MIBG and INFECTONÒ), obtaining additional regulatory approvals, if necessary, andmarketing and sales expenses associated with potential new productintroductions such as DRAXIMAGEÒ Sestamibi for which we filed an ANDA with theFDA in February 2007.  Our solemanufacturing facilities will continue to require capital investment in orderto maintain, upgrade and expand their operations.  The success of DRAXIMAGE and DRAXIS Pharmawill rely significantly on the ability of both divisions to maintain and tosubstantially increase their manufacturing capabilities to satisfy customerdemand.  There can be no assurance that,or when, we will successfully develop, receive regulatory approvals for, ormanufacture or market any new products for our own marketing purposes or forthird parties.  DRAXIS Pharma may fail torenew its existing manufacturing contracts. DRAXIS Pharma may fail to secure sufficiently lucrative new third-partymanufacturing contracts to increase its profitability.  In addition, DRAXIS Pharma may loseanticipated volumes of products if the customers for whom it manufactures saidproducts do not receive required approvals for the commercial sale ofsame.  DRAXIS Pharma may also loseanticipated volumes of existing products if its customers lose market share forproducts due to decreased demand for said products.  DRAXIMAGE may fail to increase its marketpenetration of its radioactive products, particularly in the U.S.  DRAXIMAGE may also fail to increase itsinternational sales of its key Tc-99m kits and Iodine I-131 products,particularly in Europe, if it does not receive approvals to market said products.  DRAXIMAGE may not receive timely approval ofits DRAXIMAGEÒ Sestamibi product.

 

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Theresearch, development, production and marketing of new products will requirethe application of considerable technical and financial resources by us and ourcustomers, while revenues that are generated by such products, if successfullydeveloped and marketed, may not be realized for several years.  We may not be able to sustain current andplanned levels of profitability.  We mayrequire external financing to complete certain aspects of our three-yearstrategic plan, and external sources of capital may not be available to us atan acceptable cost, if at all.

                IF WE CANNOT ADAPT TO CHANGINGTECHNOLOGIES, OUR PRODUCTS AND SERVICES MAY BECOME OBSOLETE AND OUR BUSINESSCOULD SUFFER.

                Because the biotechnology,pharmaceutical and radiopharmaceutical industry is characterized by technologychange and obsolescence, we may be unable to anticipate changes in our currentand potential customer requirements that could make our existing technologyobsolete.  Our success will depend, inpart, on our ability to continue to enhance our existing products and services,develop new technology that addresses the increasing sophistication and variedneeds of our respective customers, license leading technologies and respond totechnological advances and emerging industry standards and practices on atimely and cost-effective basis.  Thedevelopment of our proprietary technology and investing in certain nichemarkets entails significant technical and business risks.  We may not be successful in using our newtechnologies or exploiting our niche markets effectively or adapting ourbusinesses to evolving customer requirements or emerging industry standards.

                WE ARE EXPOSED TO EXCHANGE RATEFLUCTUATIONS WHICH COULD NEGATIVELY AFFECT OUR BUSINESS.

                A substantial portion of ourconsolidated revenues are now, and are expected to continue to be, realized inU.S. dollars.  Our operating expenses areprimarily paid in Canadian dollars.  Wemay be adversely affected by a significant and rapid strengthening of theCanadian dollar against the U.S. dollar, should the Canadian dollar rise invalue compared to the U.S. dollar by more than 10 cents.  We do not currently use derivativeinstruments to hedge our foreign exchange risk and currently have no plans todo so in the near future.  For fiscalyear 2006, U.S. dollar revenue accounted for approximately 53.8% of the Company’sconsolidated revenue.  During this sameperiod, the value of the U.S. dollar versus the Canadian dollar strengthened by0.2% from January 1, 2006 to December 31, 2006. As a result, in 2006 we had to charge to income $282,000 due to foreignexchange translation gain related to the strengthening of the U.S. dollar.

                IF WE LOSE THE SERVICES OF KEYPERSONNEL, WE MAY BE UNABLE TO REPLACE THEM, AND OUR BUSINESS COULD BE NEGATIVELYAFFECTED.

                Our success depends on theretention of principal members of our management staff, including Dr. MartinBarkin (Chief Executive Officer and President), Mr. Dan Brazier (ChiefOperating Officer), Mr. Jean-Pierre Robert (President, DRAXIMAGE division) andMr. John Durham (President, DRAXIS Pharma division) and on our ability tocontinue to attract, motivate and retain additional key personnel.  We have employment agreements with all ourkey management, with no fixed terms of duration.  We have key man insurance on the lives of Dr.Martin Barkin, Mr. Jean-Pierre Robert and Mr. John Durham.  The market for retaining and obtaining suchkey personnel is intensely competitive, and the loss of the services of keypersonnel or the failure to recruit necessary replacement and additionalpersonnel in a timely manner could materially and adversely affect operations.

                ALTHOUGH WE CONSIDER THE COMPANY TO HAVE GOODDEFENSES TO SUCH ACTIONS, SHOULD THE CURRENT LAWSUITS AGAINST US SUCCEED, WECOULD INCUR A SUBSTANTIAL LOSS.

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                In 1998, a Canadian legalproceeding was launched against us and our subsidiary DAHI by a formerconsultant, Jozsef Knoll, claiming royalty entitlements based on the net profitfrom sales of *ANIPRYL*®.  Total damages claimed are $100 million,including a claim to certain shares of DAHI. However, the plaintiff has takenno steps in the last seven years to move the claim forward.  While we believe that we have good defensesto the Knoll proceeding, this dispute may not be resolved in our favor, if itis pursued.  It is possible that a courtor arbitration tribunal may find us to be in breach of certain agreements, orinfringing validly issued patents of third parties or practicing theintellectual property of others.  In thatevent, in addition to the cost of defending the underlying proceeding, we mayhave to pay license fees, additional royalties and/or damages and may beordered to assign certain *ANIPRYL®-*relatedpatents and be prohibited from conducting certain activities.  Under such circumstances, we could incursubstantial loss and our business could be negatively affected.

                On July 22, 2005, we announcedthat, together with other defendants, we had received a Statement of Claimfiled before the Superior Court of Justice of Ontario alleging that PermaxÒ,a drug that we distributed in Canada for a third party manufacturer prior toJuly 2003, causes “compulsive/obsessive behaviour, including pathologicalgambling”.  The plaintiff is seeking tohave this action certified as a class action. We believe this claim against us is without merit and we intend tovigorously defend this proceeding and any motion for certification.  Prior to July 2003, PermaxÒwas distributed in Canada by DRAXIS Pharmaceutica, our Canadian pharmaceuticalsales and marketing division.  In July2003, we sold the DRAXIS Pharmaceutica division to Shire. As of December 31,2006, there have been no developments in this action.

***                RisksRelated to our Common Shares***

                OUR COMMON SHARE PRICE HAS BEEN, AND IS LIKELY TOCONTINUE TO BE, VOLATILE.

                The market prices for the securities of smallerpharmaceutical and biotechnology companies, including ours, have historicallybeen volatile, and the market has, from time to time, experienced significantprice and volume fluctuations that are unrelated to the operating performanceof particular companies.  For the lasttwo fiscal years, the price of our stock has ranged from a low of $3.90, to ahigh of $5.84 on NASDAQ (CDN$4.32 to CDN$7.05 on the Toronto StockExchange).  We believe that in the firsthalf of 2006 the volatility in the share price and volumes of shares traded wasimpacted by financial results that differed from market expectations as acontinuing result of the extended shutdown in 2005 of production of sterileproducts at DRAXIS Pharma.  We believethat the appreciation of the share price and volumes of shares trading in thesecond half of 2006 occurred as a result of improved financial results thatcame closer to market expectations and a growing recognition of the potentialvalue of new products in development.  Webelieve that the extended shutdown of production at DRAXIS Pharma for sterileproducts in 2005 and the resulting financial results that differed from marketexpectations were the most prominent factors that impacted the volatility inthe share price and the volumes traded in that year.

                Factors such as fluctuations inour operating results, announcements of competing technological innovations ornew products by our competitors, clinical trial results, governmental regulationand enforcement actions, developments in patent or other proprietary rights,public concern as to the safety of drugs developed by us or others and generalmarket conditions can have an adverse effect on the market price of our shares.  In particular, the realization of any of therisks described herein could have a material adverse impact on such marketprice.  Unusual sales of substantialamounts of our shares in the public market over a relatively short time period,or the perception that such sales will occur, could also adversely affect themarket price of our shares and make it more difficult in the future for us toraise funds through equity offerings.

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**Item 4.    Information on the Company**

                DRAXIS is a specialtypharmaceutical company providing products in three categories: sterileproducts, non-sterile products and radiopharmaceuticals.  Sterile products include liquid andfreeze-dried (lyophilized) injectables and sterile ointments.  Non-sterile products are produced as solidoral, liquid and semi-solid dosage forms. Radiopharmaceuticals are used for both therapeutic and diagnosticmolecular imaging applications.  In theradiopharmaceutical category, DRAXIS has its own products and a targetedresearch and development program for new products.  As of January 1, 2005, all of the operationsof the Company are carried out through our wholly owned subsidiary DRAXISSpecialty Pharmaceuticals Inc., which operates two major divisions, DRAXISPharma (contract manufacturing) and DRAXIMAGE (radiopharmaceuticals).  For the year ended December 31, 2006, 72.8%of our consolidated revenues were derived from DRAXIS Pharma (contractmanufacturing) and 24.2% of our consolidated revenues were derived fromDRAXIMAGE (radiopharmaceuticals).

                In addition, DRAXIS has continuingfinancial interests associated with its collaboration agreements with PfizerInc. with respect to *ANIPRYL®*,and with Shire with respect to Canadian salesof products divested in 2003.

                Our consolidated operations areintegrated across research, product development, manufacturing, sales andmarketing, as well as the in-licensing and commercial development ofradiopharmaceutical products and technologies.

                DRAXIS has emerged from atransitional phase of its development. In past years, we were reliant on income earned from *ANIPRYL®*.  For theyear ended December 31, 2006, our collaboration agreement with Pfizer Inc. withrespect to *ANIPRYL®* represented 5.2% of ourconsolidated revenues which represented the majority of our income fromroyalties and licensing.

                The common shares of DRAXIS arelisted on the Toronto Stock Exchange (ticker symbol DAX) and on NASDAQ (tickersymbol DRAX).  The shares of DRAXIS havebeen included in the NASDAQ Healthcare IndexÒ (symbol: IXHC) since July 27, 2005 and theNASDAQ Global Select MarketSM since July 3, 2006.

                Our registered and head officeis located at 6870 Goreway Drive, 2nd Floor,Mississauga, Ontario, Canada L4V 1P1. Telephone: (905) 677-5500. Fax: (905) 677-5494.

                The Company’s onlymanufacturing, research and development facilities are located at 16751Trans-Canada Road, Kirkland, Québec, Canada H9H 4J4.

                The Company’s website is:  www.draxis.com.

## **Historyand Development of the Company**

The Company was incorporated under the name Deprenyl Research Limited onOctober 13, 1987 under the *Canada BusinessCorporations Act*.  The Companywas founded principally to engage in the marketing in Canada of prescriptionpharmaceuticals discovered, developed or acquired by Chinoin Pharmaceutical andChemical Works Co. Ltd., the first of which was *ELDEPRYL®*(selegiline; 1-deprenyl), for the treatment of Parkinson’s disease.  We changed our name to DRAXIS Health Inc. inMay 1994.

We completed an initial public offering of our common shares in February1988 on the Toronto Stock Exchange.  Ourcommon shares were listed on NASDAQ in August 1989.

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Beginning in 1990, we expanded our scientific knowledge of selegilinethrough contract research arrangements, to use with companion animal.  This ultimately resulted in the formation ofour subsidiary DAHI, through which we developed and commercialized a companionanimal health product, *ANIPRYL®*.

In 1991, we began to invest in the applications of aminolevulinic acidphotodynamic therapy, which resulted in the formation of a subsidiary, DUSA Pharmaceuticals,Inc. (“DUSA”).  Through a series oftransactions from 1991 to 1996, we divested all of our interest in DUSA.

By late 1992, we faced considerable uncertainty due to the impendingthreat of generic competition for *ELDEPRYL®*, which, at that time, stillaccounted for almost 100% of our consolidated revenues.  Faced with this as well as other businesschallenges, in 1992 we began the process of recruiting new senior management todevelop and implement a new strategic business plan for the Company to (i)address the generic threat to our lead drug by expanding and diversifying ourestablished Canadian pharmaceuticals franchise; (ii) strengthen our financialposition; and (iii) diversify from our historical Canadian base through theacquisition of niche pharmaceutical products and/or manufacturing-orientedbusinesses with international growth potential.

In 1993, the leadership of the Company changed with the appointment ofDr. Martin Barkin as President and Chief Executive Officer.  Several measures were taken to strengthen ourfinancial position and to address the threat of generic competition for EldeprylÒ, including (i) expanding and diversifying our established Canadianpharmaceutical business, and (ii) diversifying our product mix through theacquisition of niche pharmaceutical products which the Company believed had thepotential for global growth.

In April 1996, a public offering of 3,000,000 common shares generatednet proceeds of $8.5 million.  InNovember 1996, we acquired the shares of DAHI that we did not previously ownthrough a mandatory share exchange transaction valued at $17.4 million.

In July 1997, we acquired from Merck Frosst Canada Inc. itsradiopharmaceutical business, which became DRAXIMAGE Inc. (since January 1,2005, known as DRAXIMAGE, a division of DRAXIS Specialty Pharmaceuticals Inc.).

In December 1997, we licenced the worldwide marketing rights for AniprylÒ to Pfizer but retained manufacturing rights for the product.  Cumulatively to December 31, 2006 $45.5million has been received in upfront and milestone payments, royalties androyalty-related payments from Pfizer.

In May 1998, we acquired our current manufacturing facility in Kirkland,Québec for $11.1 million.

During the period of 1998 to 2000, we undertook a capital expansionplan, adding our lyophilization and our radiopharmaceutical operations. Ouroperations subsequently expanded over the following two years to support of ournew contract manufacturing and radiopharmaceutical business, respectively.  In 2000, we sold a 34.1% equity interest inDRAXIS Pharma Inc. (since January 1, 2005 know as DRAXIS Pharma, a division ofDRAXIS Specialty Pharmaceuticals Inc.) to SGF Santé Inc. (“SGF”) and DRAXISPharma senior management to help finance the lyophilization expansion at ourfacilities.

In 2000, we also divested our dermatology product lines to Block DrugCompany (Canada) Limited (now part of GlaxoSmithKline Consumer Healthcare).

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In 2001, we began producing DRAXIMAGE products in our facilities andin-licenced the rights for INFECTONÒ from BTG International Limited for Canada, theU.S., South America and Europe.  We alsolaunched BrachySeedÒ I-125 and initiated production of BraccoDiagnostic Inc.’s Sodium Iodide I-131 radiotherapy capsules.

In 2001, DRAXIS Pharma signed a long term supply agreement tomanufacture several GSK products for multiple international markets.

In 2003, we launched a new radiotherapeutic Iodine I-131 kit in the U.S.for the treatment of thyroid cancer and hyper-thyroidism and received $6.5million from affiliates of Elan Corporation, plc (“Elan”) for the return ofCanadian rights for several neurology products.

In July 2003, we also sold DRAXIS Pharmaceutica, our Canadian sales andmarketing division, to Shire BioChem Inc. for $9.6 million in cash plus up to$2-9 million in market driven contingent milestones.

On April 22, 2004, we issued 3,053,436 units of the Company at apurchase price of $4.82 (CDN$6.55) per unit, for aggregate proceeds net of related expensesof $13.4 million (CDN$18.2 million).  Eachunit consists of one common share of DRAXIS and one-half of one share purchasewarrant.  Each whole warrant entitled theholder to acquire one common share of DRAXIS at a price of CDN$8.50 at any timeprior to April 24, 2006.  The warrants are transferable. Holders of warrants do not, as such,have any voting rights or other right attaching to the common shares until thewarrants are properly exercised and common shares issuable upon the exercise ofthe warrants are issued.  All warrantsexpired unexercised on April 24, 2006.

On April 22, 2004, DRAXIS acquired SGF’s 32.7% interest in DRAXIS Pharmafor cash consideration of $9.6 million (CDN$13 million).  DRAXIS used part of the proceeds from theoffering completed in April 2004 to pay for the acquisition and to repay $3.1million (CDN$4.2 million) in debt owed by DRAXIS Pharma to SGF and $1.7 million(CDN$2.3 million) in debt owed by DRAXIS Pharma to Investissement Québec.  The DRAXIS Pharma senior management interestwas also bought so that the Company became the sole shareholder of DRAXISPharma.

In June 2004, we negotiated new credit facilities withour bankers, the National Bank of Canada, providing an operating facility ofCDN$15 million (or U.S. equivalent), payable within 364 days of drawing uponthe facility and a term facility of CDN$10 million (or U.S. equivalent),repayable in full in three years.  As atDecember 31, 2006, no amount was drawn on either facility.

In November 2004, we received FDA approval for aDRAXIMAGEÒ brand of Iodine-131 therapeutic capsules.

In December 2004, we repaid all of our third-party debt.

As of January 1, 2005, we amalgamated our two wholly-owned subsidiaries,DRAXIS Pharma Inc. and DRAXIMAGE Inc., to achieve certain business and taxefficiencies.  The amalgamated subsidiary,called DRAXIS Specialty Pharmaceuticals Inc., continues to conduct business astwo divisions, DRAXIS Pharma (contract manufacturing) and DRAXIMAGE(radiopharmaceuticals), and serves as our operating arm.

In February 2005, we announced that DRAXIMAGE had received approval fromthe Dutch regulatory authority for its kit for the preparation of Technetium Tc-99m Albumin Aggregated Injection 

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(“MAA Kit”).  This approval allowed DRAXIMAGE to initiatethe Mutual Recognition Procedure (“MRP”) in pursuit of further regulatoryapprovals for the diagnostic imaging product in additional European Unioncountries.

InApril 2005, we announcedthe appointment of Mr. Jean-Pierre Robert as the new President of the DRAXIMAGEdivision effective as of May 9, 2005.

In October 2005, we announced the appointment of Mr. Dan Brazier to thenewly created position of Chief Operating Officer.

In November 2005, DRAXIMAGE announced that it would discontinue themanufacture and sale of implantable brachytherapy seeds as of December 15,2005.

In January 2006, we announced we had received approval from the FDA forour supplemental drug application for Sodium Iodide I-131 Capsules USP,Diagnostic-Oral.  We began selling thesecapsules in the U.S. in May 2006.

In March 2006, we provided an update on DRAXIMAGE’s research and productdevelopment strategy.  We indicated thatin the near term of one to three years DRAXIMAGE would focus on currentlymarketed significant radiopharmaceutical and imaging products whose patents haveexpired or are close to expiring and, in particular, sestamibi injection (forcardiac imaging).  We also announced thata major opportunity under development by DRAXIMAGE was the production anddistribution of a “next generation” version of a Technetium Generator, which isthe source of Tc-99m in virtually every radiopharmacy.  We indicated that for the medium term, in athree to five year horizon, the highest priority opportunity being pursued byDRAXIMAGE was the continued development of INFECTONÒ.  We also announced that althoughour product FIBRIMAGEÒ had met primary end points in its Phase IIIclinical trial in Canada, further market analysis had shown that newtechnologies have successfully captured the current deep venous thrombosisindications and that there was no longer an economically interesting marketopportunity at the time in either the at-risk asymptomatic patient, or thosewith symptoms.  We further indicated thatwe had decided that no significant further work would be conducted in thedevelopment of this product for its current indications but other potentialopportunities for this product would be explored.  In 2006, no other potential opportunitieswere uncovered.

In November 2006, DRAXIMAGE was approved by the FDA to run two clinicaltrials using radioactive Iobenguane I-131 Injection (also known as 131 I-Metaiodobenzylguanidine or I-131 MIBG) to treat highrisk neuroblastoma, a rare form of cancer that affects mostly infants and youngchildren.

## **RecentDevelopments**

InFebruary 2007, DRAXIMAGEannounced it had submitted an ANDA to the FDA for its generic kit for thepreparation of Tc-99M Sestamibi for Injection (DRAXIMAGEÒ Sestamibi), a nuclear medicine imaging agent used in myocardialperfusion imaging (MPI) to evaluate blood flow to the heart in patientsundergoing cardiac tests.

For information concerning the Company’s capital expenditures andmethods of financing, please see Item 5: Operating and Financial Review andProspects.

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## **BusinessStrategy**

We believe thatboth DRAXIMAGE and DRAXIS Pharma have significant long-term growth potentialand have invested considerable financial and management resources in developingthese businesses.

Our general businessstrategy is to:

·                  Focuson specialty pharmaceutical markets in which we can develop and sustain a competitiveadvantage.

·                  DRAXIShas focused its operations on two core businesses:  radiopharmaceuticals and specialtypharmaceutical contract manufacturing. Both businesses target highly differentiated, specialized markets whichfeature significant regulatory requirements and specialized manufacturingrequirements and standards.

·                  Developnew pharmaceutical products and services consistent with our strengths andcapabilities.

·                  DRAXIShas established a growing franchise in the highly differentiated radiopharmaceuticalsegment with a portfolio of 33 currently marketed products plus innovativeproprietary products in various stages of development, including DRAXIMAGEÒSestamibi for which DRAXIMAGE filed an ANDA with the FDA in February 2007.  In addition to our radiopharmaceuticalplatform, our expanding lyophilization capability positions us to offer newservices to customers and to take advantage of growth opportunities in contractmanufacturing.

·                  Pursuegrowth opportunities with international market potential.

·                  Weare leveraging our capabilities, experience and regulatory compliance inradiopharmaceuticals and manufacturing to expand our product and serviceofferings in the United States, Europe and other international markets.

·                  Leveragealliances with customers.

·                  Weare pursuing multiple opportunities with new and existing customers.  Meeting the strict quality and servicestandards of such customers positions us to expand on these relationships inboth our radiopharmaceuticals and pharmaceutical contract manufacturingbusinesses.

Our primary operational focus for 2007 continues to be: (i) improvingnear-term financial and operational performance of our radiopharmaceutical andmanufacturing businesses through increasing sales of existing products and services,improving manufacturing efficiency and effectiveness, and obtaining additionalregulatory approvals; and (ii) securing and advancing our base for long-termgrowth through the development of our existing product pipeline as well asidentifying new business opportunities that are consistent with ourcapabilities and that contribute to the long-term value of the Company.

Consistent with this strategic focus, we divested our dermatologyproduct lines in 2001 and in 2003 completed the sale of our prescriptionpharmaceutical sales and marketing business, DRAXIS Pharmaceutica.  We also realigned our senior managementresponsibilities in 2003 to focus on our core businesses. In 2005, we createdthe position of Chief Operating Officer to provide executive oversight to ourcore operating businesses and established a new management team for ourDRAXIMAGE business unit.

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The following is a description of the principalmarkets in which we operate and a breakdown of total revenues by segment andgeographic market for the three most recent financial years (1):

 
| **Geographic Segmentation** | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|------------|------------|----------|------------|----------|------------|
| ***REVENUES(2)***                | ** ** | ** ** |       |     |       |     |       |
| Canada                           | ** ** | **$**      | **39,891** |     | $          | 39,026   |       | $ | 33,609 |   |
| United States                    | ** ** | **47,900** |       | 39,612   |       | 35,310   |       |
| Other                            | ** ** | **1,176**  |       | 795      |       | 401      |       |
|                             | ** ** | **$**      | **88,967** |     | $          | 79,433   |       | $ | 69,320 |   |

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*(1)          SeeNote 19 in our 2006 Consolidated Financial Statements and Notes beginning onpage F-1*

*(2)          Revenuesare attributable to countries based upon the location of the customer.*

 

| Product Sales Revenues           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **By Major Product Groups** | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
| Radiopharmaceuticals                       | ** ** | **$**      | **21,508** |       | $          | 19,290     |       | $ | 17,172 |   |
| Manufacturing -  Sterile                   | ** ** | **51,529** |       | 41,488     |       | 31,270     |       |
| Manufacturing -  Non-Sterile               | ** ** | **13,202** |       | 13,255     |       | 15,191     |       |
| Corporate and  Other                       | ** ** | **295**    |       | 499        |       | 22         |       |
| Inter-segment  eliminations                | ** ** | **(2,989** | **)**      | (1,543     | )          | (1,962     |       |
|                                       | ** ** | **$**      | **83,545** |       | $          | 72,989     |       | $ | 61,693 |   |

 

Our two main operating businesses, radiopharmaceuticals and contractmanufacturing (sterile and non-sterile products), are not characterized bysignificant seasonality.  However, plantactivities at DRAXIS Pharma (contract manufacturing) are generally reduced orshut down once a year, usually during our third quarter, for approximately twoto four weeks in order to conduct regular required maintenance.

DRAXIMAGE’s principal raw materials are radioactive isotopes that areused to label other compounds that act as carriers or molecular targetingagents.  The isotopes are obtained fromcompanies and agencies that are licensed by governmental regulators to producepurified radioactive chemicals. Radioactive materials, by their nature, decay over time — some rapidlyand some more slowly, depending on specific isotopes.  Therefore, DRAXIMAGE receives shipments ofchemical-grade radioisotopes several times each week and converts these tofinished pharmaceutical-grade products within days or weeks.  While prices of selected isotopes can besomewhat volatile over the medium term, DRAXIMAGE endeavors to negotiatelong-term supply arrangements with appropriate suppliers, especially for the moreimportant isotopes such as radioactive Iodine.

DRAXIS Pharma, as a contract manufacturer of pharmaceutical products,obtains its chemical raw materials from approved chemical suppliers of bothactive pharmaceutical ingredients (“API”) and inactive or excipient ingredientssuch as fillers, stabilizers, preservative agents and coloring agents.  In many instances the API is supplied by thecustomer.  DRAXIS Pharma conducts fullquality control testing of all ingredients and packaging materials before theyare incorporated into the finished product. Prices of principal API are not generally volatile, although prices canvary between alternative suppliers.

## **ContractManufacturing (DRAXIS Pharma)**

Contract manufacturing accounted for 72.8% of our consolidated revenuesfor the year ended December 31, 2006. Our DRAXIS Pharma division is responsible for our contractpharmaceutical manufacturing and has capabilities in a broad range of dosageforms, specializing in liquid and lyophilized (freeze-dried) injectables andother sterile products.  Operating out ofa cGMP-compliant 

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247,000-square-footfacility located in Kirkland, Québec, DRAXIS Pharma manufactures pharmaceuticalproducts for DRAXIMAGE, as well as for over 25 other pharmaceutical clients inmany international jurisdictions.

Key business development transactions involving DRAXIS Pharma haveincluded:

·                  May 1998 — $11.1 million acquisition of DRAXISPharma’s pharmaceutical manufacturing facility.

·                  July 1999 — signing of a five-yearmanufacturing supply agreement with Warner-Lambert Canada Inc. (which thenbecame known as Pfizer Consumer Healthcare, a division of Pfizer CanadaInc.).  In September 2005, the Companyannounced that Pfizer Canada had renewed this agreement for a three year termeffective January 1, 2005.  On December20, 2006, DRAXIS Pharma was advised that J&J had purchased Pfizer’sconsumer healthcare business and that the agreement had been assigned toJ&J.

·                  February 2000 — sale of 34.1% equity interestto SGF and DRAXIS Pharma senior management for net proceeds of $5.4 million.

·                  December 2001 — signing of a long-termmanufacturing and supply agreement for the renewal and expansion of DRAXISPharma’s existing contract manufacturing relationship with GSK.

·                  March 2003 — initiation of production under amanufacturing and supply agreement with Bone Care International, Inc. (nowGenzyme) for Hectorol® Injection.

·                  April 2004 — acquisition by the Company of SGF’s32.7% interest in DRAXIS Pharma and repayment of $3.1 million (CDN$4.2 million)in debt owed by DRAXIS Pharma to SGF and $1.7 million (CDN$2.3 million) in debtowed by DRAXIS Pharma to Investissement Québec. The DRAXIS Pharma senior management interest was also bought so that theCompany became the sole shareholder of DRAXIS Pharma.

In 2004, we completed a three-year, $12 million capital plan at DRAXISPharma, including the installation of a second lyophilizer.  The capital plan also included new sterilemanufacturing capabilities to support recently announced contracts,improvements to production line efficiency, improvements to infrastructure, newraw material handling facilities and support systems to maintain the DRAXISPharma facility at the forefront of regulatory compliance.  DRAXIS Pharma’s three-year, $12 millioncapital plan was initially financed through loans and equity investment fromDRAXIS Pharma’s shareholders, loans from Investissement Québec and internallygenerated funds.  The equity wasrepurchased and the loans were repaid in April 2004 from the proceeds of theCompany’s public offering.

Since DRAXIS acquired DRAXIS Pharma, DRAXIS Pharma’s revenues have risenfrom $6.1 million for the eight-month period ended December 31, 1998 to $64.7million for the year ended December 31, 2006.

DRAXIS Pharma’s business goal is to be a leading supplier ofhigh-value-added, high-margin contract pharmaceutical manufacturingservices.  Key components of DRAXISPharma’s strategy to achieve this goal include:

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·                  obtaining and maintaining all requiredregulatory approvals for DRAXIS Pharma’s manufacturing facility;

·                  securing additional manufacturing contractswith existing and new customers;

·                  focusing on DRAXIS Pharma’s distinctivecapabilities in sterile and lyophilized product manufacturing;

·                  providing manufacturing and related services toDRAXIS’ other businesses; and

·                  focusing on operational excellence, includingregulatory compliance, cost-effectiveness and customer service.

### Overview ofPharmaceutical Contract Manufacturing

Ina report prepared by CIBC World Markets (Equity Research) and dated December 3,2002 entitled “Pharmaceutical Contract Manufacturing”, it was estimated thatthe manufacturing portion of the $400 billion global pharmaceutical market was$50 billion, with approximately $13 billion outsourced.  Since 2002, we believe that the contractmanufacturing market for pharmaceuticals has continued to grow.

Thesecondary, or dosage-form, manufacturing segment that is currently outsourcedwas further estimated to be approximately $5.5 billion with an anticipatednear-term growth in the 10% — 15% range.

The reasons pharmaceuticalcompanies outsource manufacturing include:

·                  productivitybenefits — plant utilization rates in the pharmaceutical industry are decliningand have created increased need to lower operating costs;

·                  movingassets off the balance sheet — contract manufacturers are a solution to highlevels of industry assets tied up in under-utilized facilities;

·                  leveragingexternal expertise — third-party contractors provide a logical route tospecialist services and access to updated technologies; and

·                  pharmaceuticalindustry consolidation — continuing mergers will likely force rationalizationof manufacturing capacity.

The Company believes that there is currently a significant globalshortage of sterile lyophilization capacity and that this sector offers significantlyhigher margin growth potential for DRAXIS Pharma due to its technicalcomplexity and its increasing demand as a favored dosage form for biotechnologyproducts in particular.

DRAXIS Pharma believes that the key competitive factors in the contract manufacturingindustry include the reliability of supply, quality of product, strictcompliance with governmental regulations, capacity availability, competitivepricing and the technical and manufacturing ability to produce a full range ofquantities — from small pilot batches often required for clinical trials tolarger commercial quantities.

### Competition

DRAXIS Pharma competes with pharmaceutical companies that have in-housemanufacturing capabilities as well as with third-party contract manufacturers,including Hospira Inc., Boehringer 

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Ingelheim,Cardinal Health, Inc., Hollister-Stier Laboratories LLC, DPT Laboratories,Haupt Pharma AG, Patheon Inc. and DSM Pharmaceuticals, Inc.

### ManufacturingCapabilities

DRAXIS Pharma is a customer-driven pharmaceutical contract manufacturingdivision that is positioned to manufacture a variety of dosage forms.  DRAXIS Pharma is one of a few existingfull-scale pharmaceutical contract manufacturing facilities in Canada that hasFDA-approved sterile manufacturing and sterile lyophilization capabilities.

In 2006, the organization of this contract manufacturing business wasfurther refined as we implemented separate business unit accountability forsterile and non sterile product operations to achieve a flatter, more responsiveorganization.

Plant operations at our sole manufacturing facilities in Kirkland,Québec are further organized into four manufacturing areas, supported bypackaging and warehousing and distribution functions.

*SterileLyophilization*

Lyophilization is the preferred dosage form for a broad range of sterileproducts that are unstable in liquid form. Lyophilization is a complex process of freeze-drying in which a liquidsolution is frozen under vacuum and all water is removed, leaving behind astable, dry, sterile powder that has a relatively long shelf life and is easilyreconstituted into a liquid form prior to use. Products delivered in a lyophilized dosage form include injectablepharmaceuticals, vaccines, biotechnology proteins or peptides and diagnosticproducts.

DRAXIS Pharma’s existing sterile manufacturing capabilities wereenhanced by the addition of sterile lyophilization, which became fullyoperational and approved by the FDA in the latter half of 2001.  This fully automated line includes a vial washer,a depyrogenation tunnel, an in-line filling machine, robot loaders andunloaders, the freeze-drier unit and a capper. This first freeze-drier has a capacity based on 11 square meters (120square feet) of shelf space, while the second unit installed in 2004, with 24square meters (254 square feet) of shelf space, has double the shelf space.

In 2004, theCompany completed a three-year, $12 million capital plan for DRAXIS Pharma,including the addition of the second lyophilizer, new sterile manufacturingcapabilities to support recently announced contracts, improvements toproduction line efficiency, improvements to infrastructure, new raw materialhandling facilities and supporting systems to maintain DRAXIS Pharma at theforefront of regulatory compliance.

The secondlyophilizer was incorporated into DRAXIS Pharma’s existing lyophilizationfacility.  The specialized facility wasoriginally designed to readily accommodate this second lyophilizer at a costsignificantly less than that of the initial installation with minimaldisruption to ongoing production.

The second lyophilization unit completed validationand began commercial production during 2005. At optimum configuration and given the appropriate mix of lyophilizationcycles, the second lyophilizer could potentially allow us to approximatelytriple existing lyophilization capacity over time.  We did not achieve full capacity utilizationof the new lyophilizer in 2006; however the transfer of some current productsand the introduction of new products will continue to occur in 2007 and beyond.

 

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*OtherSterile Products*

The SterileProducts Department (“SPD”) includes preparation and pharmaceutical areas withmanufacturing, filling and inspection rooms for the manufacture of injectableliquids, ophthalmic and otic products. We believe that DRAXIS Pharma possesses one of the most modernfacilities of its kind in Canada approved for the manufacture of sterileprescription pharmaceuticals for Canada, the United States and other globalmarkets.

Including the newlyophilization line, SPD covers approximately 17,100 square feet and isdesigned for segregated operations complemented by secure access controls.

Computerizedsystems are utilized for both topical and automated ointment lines in order tooptimize process control.  Both of theselines are closed-loop systems to ensure sterile integrity.  The sterile ointment system utilizes anautomated system to place tubes on the fillers, thereby minimizing humanintervention.

The processes thatare incorporated in the operation include aseptic manufacturing and filling,terminal sterilization, clean in place (“CIP”), and sterilize in place (“SIP”).  The dosage forms/product types manufacturedinclude solutions in ampoules and vials, suspensions and solutions in drop doseform and ointments in tubes.  The departmentcurrently has the capacity to fill vials ranging in size from 1 ml to 30 ml,ampoules ranging in size from 1 ml to 10 ml, and 3.5 g to 4.5 g tubes.

*Ointments,Creams and Liquids*

The16,000-square-foot Ointments, Creams and Liquids (“OCL”) Department offerssubstantial flexibility in production scale. Production of ointments and creams utilizes a gravity-fed system andincorporates segregated wash areas and clean storage areas for equipment.

Batch capabilityin the OCL Department varies from 200 to 18,000 liters and incorporates threededicated packaging lines. Interconnecting tanks can be utilized where required, thereby providingproduction flexibility.  Fully automaticvalidated CIP systems ensure the purity of each customer’s product.  Product is pumped to two of the packaginglines and gravity fed to the other two lines. Dosage forms/product types manufactured include creams, ointments,lotions, syrups, shampoos, gels and suspensions.

*SolidDosage*

The Solid DosageDepartment covers approximately 10,300 square feet of space and is comprised oftwo suites for granulating powders prior to compression plus four isolatedcompression suites in which the powders are pressed into tablets and caplets ofvarious forms and sizes.  The firstgranulation suite is designed for large-batch blending, granulating and drying,while the second granulation suite is equipped with smaller scale equipmentthat can be used for small production or pilot batches.

Each granulationand compression suite has its own testing equipment and cleaning area.  The rooms are isolated and have purpose-builtairflow systems to contain powder.

Dosage forms andproduct types manufactured in this department include tablets in bottles andblisters, caplets in bottles and blisters, and powders.

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#### *Packaging*

The Packaging Department covers approximately 51,000 square feet andincorporates an open space with movable separations that provide flexibility inthe packaging area featuring several packaging lines.  Segregated zones are defined for de-boxing,filling and secondary packaging.  Barcoding ensures complete control of all packaging components.

Within the department there are packaging lines for ointments andcreams, a line for liquid packaging, lines for tablets (bottles and blisters),a sterile product packaging line which includes automatic inspection and a linededicated for lyophilized products and topical packaging.  The inspection of finished sterile productsin glass ampoules includes automated inspection by a leak pinholedetector.  An automatic inspectionmachine has been validated to detect particles in sterile products packaged invials and ampoules.  These products mayalso be inspected manually.

### Regulatory

Manufacturing operations at DRAXIS Pharma, from receipt of raw materialand packaging ingredients, through compounding, dosage form processing,filling, labeling and packaging, to final product release by quality control,are all conducted in accordance with cGMP requirements and other appropriateinternational regulatory standards. Regular inspections of facilities, production processes, and control andvalidation systems, as well as employee training programs, are conducted byDRAXIS Pharma, by U.S., Canadian and international governmental regulatoryagencies and by customer inspection teams throughout the year.  DRAXIS Pharma maintains a distinct internalteam to provide effective liaison with various external inspection groups.

DRAXIS Pharma has a strong regulatory track record.  This includes 13 successful audits of ourfacilities in 2006 (0 regulatory inspections and 13 client audits) and 12successful audits of our facilities in 2005 (2 regulatory inspection and 10client audits).

### Warehousingand Distribution

The warehousing and distribution facilities at DRAXIS Pharma at our facilitiesin Kirkland, Québec, allow additional manufacturing flexibility andefficiency.  A five-tier pallet-rackingwarehouse has a full height of 29 feet, covers approximately 48,900 square feetof space and has six shipping and receiving docks.  The warehouse has separately locked areas,including refrigeration units to control sensitive raw materials and finishedgoods.

DRAXIS Pharma alsohas a raw material storage and dispensing area, which provides an improvedenvironment for the handling and accurate dispensing of raw materials. Thisinstallation improves the flow of material and personnel.

### Customers

#### *Third-Party Contract Manufacturing*

DRAXIS Pharmamanufactures prescription and non-prescription pharmaceutical products for morethan 20 pharmaceutical companies (excluding inter-company manufacturing)pursuant to manufacturing supply contracts. Such contract manufacturing represented 72.8% of our consolidatedrevenues for the year ended December 31, 2006. A significant portion of this contract manufacturing business is focusedon our three largest customers, Genzyme, GSK and Johnson & Johnson, Inc.(prior to December 20, 2006 Pfizer Consumer Healthcare, a division of PfizerCanada Inc.) which represented

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56% of our consolidatedrevenues in 2006.  See “Risk Factors —Risks Related to our Company — A Significant Portion of our Business isDependent on a Small Number of Key Customers”.

In April 2002, DRAXIS Pharma entered into an agreement with Bone CareInternational, Inc. (now Genzyme) to produce Hectorol® Injection for sale in the U.S., and we begancommercial shipments of the sterile injectable product in March 2003.  A manufacturing and supply agreement wassigned on March 3, 2003.  The agreementis for a five-year term and is automatically renewed at the end of its term forone year period unless either party gives written notice of non renewal to theother party one year prior to the end of the term or the end of a renewalperiod.

On December 18, 2001, DRAXIS Pharma finalized supply and related agreementswith GSK for the renewal and expansion of an existing contract manufacturingrelationship between the companies.  Theproducts transferred to DRAXIS Pharma were all established, sterile productsmarketed by GSK in multiple international markets.  In 2002, a prescription sterile injectableproduct for the U.S. market was added under this contract and commercialproduction of this product commenced in the second quarter of 2002.  During 2002, site transfer and relatedactivities associated with the other GSK products were undertaken andproduction started in the second quarter of 2003 and ramped up through 2003 and2004 with full production of all products achieved by the end of 2004.  DRAXIS Pharma will manufacture the productscovered by the agreement until it receives a termination notice from GSK whichmay be given by a two-year advance written notice given on or after December31, 2007.

On July 1, 1999, DRAXIS Pharma entered into a five-year manufacturingand supply agreement with Warner-Lambert Canada Inc. (which then became knownas Pfizer Consumer Healthcare, a Division of Pfizer Canada Inc.) coveringseveral non-prescription products for the Canadian market, includingPolysporin®, Sudafed®, Actifed® and Zincofax®. Manufacturing of these products commenced in early 2000.  On September 1, 2005, DRAXIS announced it hadrenewed its agreement with Pfizer Canada for a three-year term, effectiveJanuary 1, 2005.  On December 20, 2006,DRAXIS Pharma was advised that J&J had purchased Pfizer’s consumer healthcarebusiness and that the agreement had been assigned to J&J.

#### *Inter-Company*

Beginning in early2002, DRAXIS Pharma became the FDA-approved manufacturing site for DRAXIMAGE’slyophilized Tc-99m Kits.  In addition,DRAXIS Pharma has been qualified as the manufacturing site for *ANIPRYL®* tablets.

### Employees

As at December 31,2006, DRAXIS Pharma had 404 employees (representing approximately 80% of theCompany’s employees), consisting of: 64 managerial employees, 43 clericalemployees, 62 quality operations employees and 235 unionized hourlyemployees.  The unionized hourlyemployees are represented by the United Food & Commercial WorkersInternational Union, Local 291 (AFL-CIO). A collective agreement with a five-year term to April 30, 2008 wasratified in February 2004.  DRAXIS Pharmacurrently has no significant unresolved issues with the union.  See “Risk Factors — Risks Related to ourCompany — Our Business Could be Harmed if there were a Dispute or Disruptionwith our Unionized Employees”.

### Former EquityPartners

From February 2000to April 2004, SGF and senior management of DRAXIS Pharma held anon-controlling equity interest in DRAXIS Pharma Inc. (now known as DRAXISPharma, a division of

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DRAXIS SpecialtyPharmaceuticals Inc.).  In 2002 and 2003,DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a division of DRAXIS SpecialtyPharmaceuticals Inc.) repurchased and cancelled shares held by a former DRAXISPharma employee and members of DRAXIS Pharma’s management team in exchange forcash and settlement of existing loans. In April 2004, the Company acquired from SGF its 32.7% interest inDRAXIS Pharma and also repaid $3.1 million (CDN$4.2 million) in debt owed byDRAXIS Pharma to SGF.  The DRAXIS Pharmasenior management interest was also bought so that the Company became the soleshareholder of DRAXIS Pharma.

## **Radiopharmaceuticals**

Radiopharmaceuticalsaccounted for 24.2% of our consolidated revenues for the year ended December31, 2006.  Our DRAXIMAGE division isresponsible for discovering, developing, manufacturing, and marketing ourdiagnostic imaging and therapeutic radiopharmaceutical products for the globalnuclear medicine marketplace.  Nuclearmedicine entails the use of radioactive drugs (radiopharmaceuticals) forimaging and therapeutic purposes.  The energyreleased as these products decay can be harnessed to:  (i) elicit a visual representation of variousorgans and tissues (nuclear imaging); or (ii) destroy cancerous cells(radiotherapy).  Products currentlymarketed by DRAXIMAGE include a line of lyophilized Technetium-99m kits (“Tc-99m”)used in nuclear imaging procedures and a line of imaging and therapeuticproducts labeled with a variety of isotopes, including iodine.

As announced on February 2, 2007, DRAXIMAGE submitted an ANDA to the FDAfor its generic kit for the preparation of Tc-99m Sestamibi for injection (“DRAXIMAGEÒ Sestamibi”), a nuclear medicine imaging agent used in myocardialperfusion imaging (“MPI”) to evaluate blood flow to the heart in patientsundergoing cardiac tests.

According to AMR/Arlington Medical Resources, in 2006 there were morethan seven (7) million cardiac studies conducted in the U.S. out of a total ofover 15 million nuclear medicine procedures, making MPI the most widelyperformed nuclear medicine scan.  Recentmarket research indicates that existing MPI products generate revenues inexcess of $500 million annually in the U.S. and that the imaging agent mostoften used in conducting MPI procedures is sestamibi labeled with theradioactive isotope Technetium-99m (“Tc-99m Sestamibi”).

Once its product is approved, DRAXIMAGE plans to enter the MPI marketafter the key patent for the currently marketed Tc-99m Sestamibi productexpires, which is expected to be in 2008 for the United States.  DRAXIMAGE also plans to file for marketingapprovals in other jurisdictions, including European countries.

DRAXIMAGE also has a number of products in development, including aTechnetium-99m-based diagnostic imaging product, *INFECTON®*,for which three of four Phase II trials conducted in Canada and the U.S. havebeen completed.  A fourth trial wasdiscontinued due to a change in market focus. An expert panel, comprised of respected nuclear medicine specialists andmicrobiologists, was assembled and this expert panel reviewed the preliminaryscientific and clinical data together with the outcome of the market researchstudies.  The role of the expert panelwas to assess the results to date, review potential target markets, and adviseDRAXIMAGE on the design of future clinical studies and appropriateindications.  The preliminary report ofthe expert panel recommended that the product be reformulated fororthopaedic-related indications and the assessment of such formulations isunder way.  DRAXIMAGE has also receivedapproval in November 2006 from the FDA to run two clinical trials in the U.S.using radioactive Iobenguane I-131 Injection (also known as 131I-metaiodobenzylguanidine, or I-131 MIBG) to treat high-risk neuroblastoma, arare form of cancer that affects mostly infants and young children.  Given the inherent uncertainties associatedwith new drug development, it is difficult to predict if, or when, theseproducts will achieve commercialization. See “Risk Factors — Risks Related to our

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Industry— If the Market Does Not Accept our Products Currently in Development, ourBusiness Could Be Harmed”.

Founded in 1950 as a division of Charles E. Frosst & Co., thepredecessor business to DRAXIMAGE pioneered and became a leader in the medicalapplication of nuclear technology after assuming the development function fromAtomic Energy of Canada Ltd.  Followingthe 1965 acquisition of Charles E. Frosst & Co. by Merck Inc. (“Merck”),the business continued operations as a division of Merck’s Canadian subsidiary,Merck Frosst Canada and Co. (“Merck Frosst”), until its acquisition by DRAXISin 1997.  As part of the acquisition, theCompany retained all of the business’s managers, scientists and employees aswell as its existing products and intellectual property.

The acquisition of this business was consistent with our strategy ofacquiring specialty pharmaceutical platforms with potential for expansion intoglobal markets.  We believe that DRAXIMAGE is the only company thatmanufactures I-131 radiopharmaceutical products in Canada.

DRAXIMAGE and its predecessor have a long history of technological andscientific progress in the field of radiopharmaceuticals.  Notable achievements include the developmentof lyophilized kits for the in-situ preparation of Technetium-99mradiopharmaceutical products for nuclear medical imaging (“Tc-99m Kits”); thedevelopment of chelates for the indium/yttrium and Technetium/rhenium groups ofmetals; and the development of stabilizers for use in iodinatedradiopharmaceuticals, which resulted in DRAXIMAGE being one of the fewproviders to market iodinated products that do not require refrigeration.

Key business development transactions involving DRAXIMAGE have included:

·                  July 1997 — $8.6 million acquisition of theCanadian radiopharmaceutical division of Merck Frosst, which began operationsthrough DRAXIMAGE Inc. (now known as DRAXIMAGE, a division of DRAXIS SpecialtyPharmaceuticals Inc.).

·                  October 1999 — licensing from Isogenic ScienceLtd. (“Isogenic”) of the rights to Isogenic’s proprietary technology related toradioactive brachytherapy implants (“*BrachySeed*®”)for the treatment of various localized cancers.

·                  July 2000 — signing of a non-exclusivedistribution agreement with Syncor International Corporation (now known asCardinal Health 414, Inc.) for the production of a kit for the preparation ofSodium Iodide I-131 Capsules and Oral Solution indicated for the treatment ofthyroid cancer and hyperthyroidism for sale in the U.S.

·                  December 2000 — entering into license,distribution and supply agreements for *BrachySeed*® forthe U.S. market with Cytogen Corporation.

·                  March 2001 — licensing from BTG InternationalLimited (formerly known as the British Technology Group) of the rights to *INFECTON®*, an agent for imaging infection.

·                  October 2001 — long-term third-party manufacturingagreement to supply Bracco Diagnostics Inc. with sodium iodide I-131radiotherapy capsules for the U.S. market.

·                  April 2003 — termination of license,distribution and supply agreements with Cytogen Corporation for *BrachySeed*® for the U.S. market.

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·                  May 2003 — expansion of agreements withIsogenic for global rights to proprietary technology related to brachytherapyimplants.

·                  July 2003 — extension and expansion ofstrategic partnership with Bristol-Myers Squibb Canada Co. (“Bristol-MyersCanada”) for the marketing and distribution of radiopharmaceutical products inCanada.

·                  August 2003 — amendment to the July 2000agreement with Cardinal Health, 414 Inc. to enable DRAXIMAGE to distribute thenew radioactive Iodine I-131 kit product to independent radiopharmacies in theU.S.

·                  February 2005 — announcement that DRAXIMAGE hadreceived approval from the Dutch regulatory authority for its kit for thePreparation of Technetium Tc-99m Albumin Aggregated Injection (“MAA Kit”).  This approval allowed DRAXIMAGE to initiatethe Mutual Recognition Procedure (“MRP”) in pursuit of further regulatoryapprovals for the diagnostic imaging product in additional European Unioncountries.

·                  April 2005 — announcement of the appointment ofMr. Jean-Pierre Robert as the new President of the DRAXIMAGE division.

·                  November 2005 — DRAXIMAGE announced it woulddiscontinue the manufacture and sale of implantable brachytherapy seeds as ofDecember 15, 2005.

·                  January 2006 — DRAXIMAGE announced it hadreceived approval from the FDA for its supplemental new drug application forSodium Iodide I-131 Capsules USP, Diagnostic-Oral.

·                  November 2006 — DRAXIMAGE announced it had beenapproved by FDA to run two clinical trials using radioactive Iobenguane I-131Injection (also known as 131I-metaiodobenzylguanidine or I-131 MIBG) to treathigh risk neuroblastoma, a rare form of cancer that affects mostly infants andyoung children.

·                  February 2007 — DRAXIMAGE announced it hadsubmitted an ANDA to the FDA for its generic kit for the preparation of Tc-99MSestamibi for Injection (DRAXIMAGEÒ Sestamibi), a nuclear medicine imaging agentused in myocardial perfusion imaging (MPI) to evaluate blood flow to the heartin patients undergoing cardiac tests.

DRAXIMAGE’s growth strategy is to leverage its history and experience inthe research, development, manufacture and distribution of radiopharmaceuticalproducts and services and to capitalize on its manufacturing capabilities.  In particular, DRAXIMAGE’s business strategyincludes:

·                  Increasing the market penetration of itsradioactive products, particularly in the U.S.;

·                  Increasing international sales of its keyTc-99m Kits and Iodine I-131 products, particularly in Europe;

·                  Timely, cost-effective development of itsportfolio of proprietary, innovative imaging and therapeuticradiopharmaceutical products; and

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·                  Identifying and capitalizing on additional newbusiness opportunities and strategic partnerships which are consistent withDRAXIMAGE’s capabilities, including the monitoring of products that will comeoff patent protection in key markets that can be manufactured, marketed andsold by DRAXIMAGE and monitoring products that are owned by third parties andwhich could be divested in the consolidation that is taking place in theradiopharmaceutical industry.

### Overview ofRadiopharmaceuticals

The medical specialty of nuclear medicine involves the use ofshort-lived radioisotopes for both diagnostic imaging and therapeuticapplications.  Pharmaceutical productsused in such applications are commonly called radiopharmaceuticals.  Radiopharmaceuticals represent awell-defined, growing niche market that involves challenges such as regulatoryapprovals, specialized manufacturing standards, access to supply and criticaldelivery logistics.

#### *Diagnostic Imaging Applications*

The diagnostic imaging applications of nuclear medicine normally involvethe intravenous administration of a radiopharmaceutical consisting of atargeting molecule, which has a particular binding affinity for a specificorgan or tissue linked to a low intensity, short-lived, gamma-emittingradioisotope such as Tc-99m.  Followingadministration, the radiopharmaceutical with its radioactive isotopeconcentrates at the biological target, which is then imaged using a scanningdevice such as a gamma camera.  A gammacamera consists of a scintillation crystal which, when placed over a region ofthe body, is capable of detecting gamma rays emitted by radionuclides inunderlying tissues.  The gamma camera andits associated computerized peripheral devices accurately measure the radiationbeing emitted by the radioisotope and so provide both a visual picture of thetarget and quantitative data concerning the distribution of radioactivity.

A nuclear medicine image provides both static and functional, ordynamic, information about a biological target, thereby revealing functionaland morphological information normally unobtainable by other imaging techniquessuch as X-ray, magnetic resonance imaging, computer tomography, and ultrasound,all of which provide primarily anatomical information.

Nuclear medical imaging procedures are established and trusted medicalprocedures with many years of safe and effective use.  Most procedures are non-invasive, areperformed with a minimum of discomfort and inconvenience to the patient and arenormally less costly and involve less risk than other currently availablehigh-tech alternative techniques.

#### *Therapeutic Applications*

Increasingly, therapeutic radiopharmaceuticals are being used and newproducts are being developed for the treatment of disease, particularly for thetreatment of various cancers.  Examplesof currently marketed therapeutic radiopharmaceuticals include:

·                  various sodium iodide I-131 products for thediagnosis and treatment of thyroid cancer and hyperthyroidism;

·                  phosphorous-32 for the palliative treatment ofbone pain for patients with advanced metastatic bone cancer; and

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·                  I-131 meta-iodobenzylguanidine (MIBG) for thetreatment of neuroblastoma.

New generations of anti-cancer agents based on targeting molecules suchas peptides, proteins, metabolites and monoclonal antibodies that have bindingaffinities to the surface of cancerous cells are being developed to be linkedto more potent, higher-intensity, beta-emitting radioisotopes such as yttrium-90,rhenium-186, holmium-166 and lutetium-199. There is a growing body of scientific evidence that molecules, thusbound, will permit the delivery of therapeutic quantities of radiation directlyto malignant cells.

### Competition

The radiopharmaceutical field is highly specialized, particularly in thetherapeutic area.  Challenges includemeeting pharmaceutical product and nuclear regulatory requirements, having theability to handle radioactive materials and establishing facilities andprocedures to manufacture products in a sterile lyophilized or freeze-driedform, which involves manufacturing standards higher than those typicallyemployed for most pharmaceutical products. In addition, manufacturing and distribution logistics systems must bewell-integrated and supportive to ensure that radiopharmaceutical products canbe produced rapidly and delivered to the end user in a timely manner with theprescribed level of strength.

Companies with significant radiopharmaceutical operations includeBristol-Myers Squibb Company, GE Healthcare - Amersham, Mallinckrodt, Inc., adivision of Tyco Healthcare, CISBio, and Bracco SpA.  In addition, thereare a number of companies that are developing and/or marketing otherradiopharmaceutical products, including MDS Nordion Inc., Immunomedics, Inc.,Cytogen Corporation, Biogen Idec Inc. and Molecular Insights Pharmaceuticals,Inc.

### MarketedProducts

DRAXIMAGE’s products are divided into two groups: (i) radioactiveproducts, which are in a radioactive and ready-to-use form when shipped tocustomers, and (ii) non-radioactive products (predominantly Tc-99m Kits).  The non-radioactive kit products are sold inlyophilized (freeze-dried), non-radioactive form consisting of sterile,pyrogen-free complexes of chemical and/or biological substances.  Tc-99m Kits are reconstituted withradioactive Tc-99m in the nuclear medicine laboratory of a hospital or aunit-dose service supplier, or radiopharmacy, prior to use.

#### *Radioactive Products*

Radioactive products, which are shipped by DRAXIMAGE with theradioactive isotope already incorporated, are distributed to the nuclearmedicine departments of hospitals or diagnostic clinics in a ready-to-use form.

The following table summarizes the DRAXIMAGE radioactive products.  All products listed have received approvalfor sale by the applicable regulatory body in the territory in which theproduct is sold.

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| **Product**      | ** **                                                  | **Indication** | ** **                                  | **Principal Markets** |
|------------------|-------------------------------------------------------------|----------------|---------------------------------------------|-----------------------|
| Imaging Products |                                                        |           |                                        |                  |
|             | 51Chromate Injection, USP                                   |           | Measurement of blood volume                 |                  | Canada |
|             | 57Co-Cyanocobalamin Capsule USP                             |           | Diagnosis of Vitamin-B12 malabsorption |                  | Canada |
|             | 57Co-Standard Cobalt Reference Solution                     |           | Reference for 57Co-Cyanocobalamin           |                  | Canada |
|             | 111In-Diethylene  Triamine Pentacetic Acid Injection (DTPA) |           | Cisternography                              |                  | Canada |
|             | 111In-Indium Chloride Sterile Solution                      |           | Labeling of peptides and  antibodies        |                  | Canada |
|             | 131I-Sodium Iodide Diagnostic Capsules, Oral                |           | Imaging of thyroid disorders                |                  | Canada/U.S. |
|             | 131I-Sodium Iodide Diagnostic Solutions, Oral               |           | Imaging of thyroid disorders                |                  | Canada |
|             | 131I-meta-iodobenzylguanidine                               |           | Adrenal imaging                             |                  | Canada |
|             | 125I-Iodinated Albumin Injection, USP                       |           | Measurement of blood and  plasma volume     |                  | Canada |
|             | 133Xe-Xenon Gas                                             |           | Lung ventilation studies                    |                  | Canada |

 
| Therapeutic Products |                                                                                       |   |                            |   |
|----------------------|--------------------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                 | 131I-Sodium Iodide Therapeutic Solutions, Oral  and Intravenous                            |   | Treatment of thyroid  disorders |   | Canada |
|                 | 131I-Sodium Iodide  Therapeutic Capsules Oral                                              |   | Treatment of thyroid  disorders |   | Canada/U.S. |
|                 | Kit for the Preparation of  Sodium Iodide I-131 Capsules and Solution USP Therapeutic Oral |   | Treatment of thyroid disorders  |   | U.S. |
|                 | 32P-Sodium  Phosphate Solution, USP                                                        |   | Treatment of polycythemia       |   | Canada |

 

*Sodium Iodide I-131 Radiotherapy*

In October 2001, DRAXIMAGE entered into a third-party manufacturingcontract to supply sodium iodide I-131 radiotherapy capsules for BraccoDiagnostics Inc. for the U.S. market for the treatment of thyroid cancer andhyperparathyroidism.

In January 2003, DRAXIMAGE received FDA approval to produce and market anew radiopharmaceutical kit product for the preparation of Sodium Iodide I-131 Capsulesand Oral Solution for the treatment of thyroid cancer and hyperthyroidism.  This was the first such product on the marketthat allows physicians and radiopharmacists to prepare an FDA-approved I-131gelatin capsule or oral solution.  InMarch 2003, DRAXIMAGE launched the new kit product and initiated shipments tothe Nuclear Pharmacy Services group of Cardinal Health 414, Inc., under afive-year, non-exclusive distribution agreement for the product for the UnitedStates and its possessions.  As of 2003,this product was made available to other customers and distributors in the U.S.

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In November 2004, DRAXIMAGE received FDA approval for a DRAXIMAGEÒ brand of I-131 therapeutic capsules.

In November 2005, DRAXIMAGE announced it had received FDA approval for anew larger format version of its I-131 kit for the preparation of Sodium IodideI-131 Capsules and Oral Solution. DRAXIMAGE introduced this product in the U.S. market in January 2006.

In January 2006, DRAXIMAGE announced it had received approval from theFDA for its supplemental new drug application for Sodium Iodide I-131 CapsulesUSP, Diagnostic-Oral.  These diagnosticSodium Iodide I-131 Capsules are intended to be used by physicians to performthe radioactive iodide (RAI) uptake test to evaluate thyroid function prior totreatment with stronger therapeutic doses of Sodium Iodide I-131.  Diagnostic doses of Sodium Iodide I-131 mayalso be employed in localizing metastases associated with thyroid malignancies.  DRAXIMAGE introduced the new diagnosticcapsules into the U.S. market in May 2006.

#### *Non-Radioactive Products*

DRAXIMAGE currently markets the following non-radioactive products.  All products listed have received approvalfor sale by the applicable regulatory body in the territory in which theproduct is sold.
| **Product** | ** **                                                                                           | **Indication** | ** **                                                                      | **Principal  Markets** |
|-------------|------------------------------------------------------------------------------------------------------|----------------|---------------------------------------------------------------------------------|------------------------|
| Tc-99m Kits |                                                                                                 |           |                                                                            |                   |
|        | 99mTc-MarcoAggregated  Albumin Kit (“MAA”)                                                 |           | Diagnosis of lung perfusion                                                     |                   | U.S./Canada/ Holland |
|        | 99mTc-Diethylene  TriaminePentacetic Acid Kit (“DTPA”) Stabilized with p-Aminobenzoic Acid |           | Diagnosis of kidney function,  blood pool imaging and lung ventilation function |                   | U.S./Canada |
|        | 99mTc-Calcium Glucoheptonate Kit                                                                     |           | Diagnosis of kidney function                                                    |                   | U.S./Canada |
|        | 99mTc-MethyleneDiphosphonic  Acid Kit (“MDP”) Stabilized with p-Aminobenzoic Acid          |           | Diagnosis of inflammatory and  neoplastic bone disease                          |                   | U.S./Canada/ Holland |
|        | 99mTc-Calcium Gluceptate Kit                                                                         |           | Diagnosis of kidney function  and red blood cell imaging agent                  |                   | Canada |

 
| Other  |                     |   |                         |   |
|--------|--------------------------|--------|------------------------------|--------|
|   | Intrinsic Factor Capsule |   | Use with 57Co-Cyanocobalamin |   | Canada |
|        |                          |        |                              |        |  |

 

DRAXIMAGE’s major non-radioactive products are its MDP, DTPA and MAATc-99m diagnostic imaging kits.  Whilethese products would technically be classified as generic pharmaceuticalproducts, DRAXIMAGE’s versions are proprietary and are sold under the DRAXIMAGEÒ trademark or that of its local distributors.  All three of these products feature aproprietary formulation that provides additional shelf life followingreconstitution compared to competitive products.

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On October 25, 1995, Frosst Radiopharmaceuticals, a division of MerckFrosst Canada Inc. (now known as DRAXIMAGE) entered into a non-exclusivedistribution agreement with Syncor International Corporation (now known asCardinal Health 414, Inc.) for distribution in the U.S. of DTPA, a kit used to prepareTc-99m Pentetate to study kidney clearance, and MDP, a kit used to prepareTc-99m Methylene Diphosphonic Acid to study bone metabolism.  The initial term was for five years, withautomatic renewal of the agreement for successive two-year periods.

Prior to 2002, DRAXIMAGE produced Tc-99m kits at its Merck Frosstlocation.  Following FDA approval of theCompany’s new lyophilization production facilities in early 2002, the resultingincreased manufacturing capacity provided the opportunity to increase salesvolumes of these products in existing markets in the U.S. and Canada and tobuild new markets in Europe and Asia, territories in which product approvalsare either already in place or expected to be granted in the near future.

In March 2004, DRAXIMAGE received approval from the FDA to produce andmarket a new formulation of MDP, called MDP-25, a kit for the preparation ofTechnetium Tc-99m Medronate Injection. In September 2005, MDP-25 was approved by Health Canada.

### Products underDevelopment

As of March 19, 2007, DRAXIMAGE had the following products underdevelopment:

| Product               | ** ** | **Status**                       | ** ** | **Indication**                  |
|-----------------------|------------|----------------------------------|------------|---------------------------------|
| Imaging Products      |       |                             |       |                            |
| *INFECTON®*      |       | Phase II (Canada, U.S. and U.K.) |       | Infection/inflammation  imaging |
| Technetium Generators |       | Generic Development              |       | Tc-99m for imaging              |
| Therapeutic Products  |       |                             |       |                            |
| I-131 MIBG            |       | Phase I (U.S.)

Phase II (U.S.)  |       | neuroblastoma                   |

 

The clinical development of radiopharmaceutical imaging agents differsfrom that of therapeutics in several areas. While therapeutics are developed tooffer improved efficacy and safety in the treatment of a specific disorder,radiopharmaceutical imaging agents are elaborated for demonstrating theexistence and extent of a specific condition. Therefore the trial design forestablishing efficacy is not the same. In the case of radiopharmaceuticalimaging agents the endpoint is the actual image. The analysis is thereforecentered around various quantitative and qualitative aspects of the image. Forexample, the image quality is assessed at various time points to determine thetime to best quality. Also a blinded read of images is conducted to determinethe accuracy as well as the sensitivity and specificity of the test incomparison to the modality that is currently accepted as the gold standard. Inorder for the test to be useful across clinical sites the inter-raterreliability should also be high. This is an important endpoint that is measuredby a weighted Kappa test. These are the main efficacy considerations forradiopharmaceutical imaging agents. The analysis of safety is similar to thatof therapeutic agents and includes the usual vital sign monitoring as well asthe capturing of side effects through adverse event reporting.

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#### *INFECTON*®

Description - *INFECTON*®, acomplex of Tc-99m and the anti-bacterial agent ciprofloxacin, is a novel agentfor the specific imaging of infection.  *INFECTON*® acts by binding directly to infecting organismsand so is expected to be highly specific for imaging infection.  It is anticipated that *INFECTON*®may be used to image orthopedic bone infection.

Technology Partner - *INFECTON*® wasdiscovered by Drs. Britton and Solanki at St. Bartholomew’s Hospital in London,England.  In March 2001, DRAXIMAGE enteredinto an agreement with BTG International Limited (formerly known as the BritishTechnology Group).  The agreement givesDRAXIMAGE exclusive rights to manufacture and sell *INFECTON*®in the U.S., Canada, South America and Europe. DRAXIMAGE has a sub-license from Bayer AG for the diagnostic imaging useof its ciprofloxacin.

Regulatory Status - *INFECTON*’s®proof of principle was established in a series of clinical trials sponsored bythe International Atomic Energy Agency involving 879 patients in severalcountries outside North America in which *INFECTON*®displayed excellent results, with a sensitivity of 88.3%, a specificity of86.5%, and an accuracy of 87.6%.  Theclinical studies showed that the agent achieved up to 96% specificity indetecting bacteria in the lungs, bones and tissues — areas where otherdiagnostics have failed in the past.

In January 2003,DRAXIMAGE initiated a Phase I clinical trial of *INFECTON*®in Canada, conducted by Dr. Raymond Taillefer at Hôpital Hotel-Dieu at theCentre Hospitalier du l’Université de Montréal. The study involved 10 healthy subjects in an open-label, single-center,single-dose safety, pharmacokinetic and radiation dosimetry study.  Whole body images were taken at variousintervals after injection of *INFECTON*® to visualizedistribution of the imaging agent throughout the body over time.  The Phase I study was completed during thefirst half of 2003.  *INFECTON*®was found to be safe and well tolerated by the subjects at the administereddosages.  The results of a Phase I trialdo not provide enough evidence regarding safety to support an application formarketing with the FDA or the HPFBI, as applicable and additional tests areconducted and submitted in support of any application for approval.  Subsequent results often do not corroborateearlier results.

In July 2003,DRAXIMAGE initiated two Phase II clinical studies of *INFECTON*®in Canada.  The first of the Phase IIstudies was a single-dose, open-label, multi-center trial involving 30 diabeticpatients suffering from clinically confirmed bacterial infections of thefoot.  The second study examined andcompared the uptake of *INFECTON*® inpatients with either a known soft tissue infection or a chronic inflammatorycondition that is sterile.  A total of 50patients with definitive bacterial infections or confirmed chronic asepticinflammatory conditions were enrolled in the single-dose, open-label,multi-center trial.  Twenty-five patientsfrom each group were included in the trials. These studies have beencompleted.  In September 2004, theCompany received approval from the FDA to initiate a Phase II clinical trial inthe U.S. - single-dose, open-label, multi center trial involving 22 patientssuffering from bacterial osteomyelitis. Enrolment in this Phase II trial was fully completed by the end of2005.  In March 2005, the Companyinitiated a fourth Phase II clinical trial in the U.S. to examine patientssuffering from expected appendicitis, but this trial was discontinued due to achange in market focus by the Company. An expert panel, comprised of respected nuclear medicine specialists andmicrobiologists, was assembled and this expert panel reviewed the preliminaryscientific and clinical data together with the outcome of the market researchstudies.  The role of the expert panelwas to assess the results to date, review potential target markets, and adviseDRAXIMAGE on the design of future clinical studies and appropriateindications.  The preliminary report ofthe expert panel recommended that the product be reformulated fororthopaedic-related indications and the assessment of such potentialformulations is

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under way.  Giventhe inherent uncertainties associated with new drug development, it isdifficult to predict if, or when, this product candidate will achieve commercialization.

Competing Diagnostic Modalities - The most specific current procedurefor medical imaging of inflammation due to infection involves removing bloodfrom the patient, isolating white blood cells in the patient’s blood,radiolabelling the white blood cells with an isotope such as indium-111 orTechnetium coupled with a carrier molecule and then injecting the white bloodcells back into the patient.  These whiteblood cells localize around the site of the infection and the associatedradiation can be detected using a gamma camera. White blood cells are not highly specific and cannot readily distinguishinfection from inflammation. Immunomedics, Inc. (NASDAQ: IMMU) announced in January 2005 that it hadreceived Health Canada approval for the marketing and use of its productLeukoScan® for the detection of osteomyelitis. However, according to Immunomedics, Inc.’s website, the product is notpresently sold in Canada.  LeukoScan® isa murine monoclonal IgG antibody fab’ fragment labeled with Tc-99m.  We believe that *INFECTON*®would offer a more convenient alternative to white blood cell labellingcurrently used which uses a process of removing blood from a patient, isolatingwhite blood cells in the patient’s blood, radiolabelling the white blood cellswhen an isotope such as Indium-111 or Technetium coupled with a carriermolecule and reinjecting the white blood cells into the patient.  *INFECTON*® is aradiolabeled imaging agent which is injected directly into the patient withoutthe complexities associated with labelling the patient’s own white cells.

Potential Advantages of *INFECTON*® -Preliminary investigations suggest the possibility that *INFECTON*®may be capable of distinguishing inflammation from infection.

*DRAXIMAGE**Ò**I-131 MIBG*

Description - DRAXIMAGEÒ I-131 MIBG is used to treat neuroendocrine(cardinoid) tumours, adrenal tumors (neuroblastoma in children andphaechromocytoma) and on rare occasions it can be used to treat thyroidcancer.  Iobenguage is m-iodo-benzylguanidine(MIBG), a guanethidine derivative structurally resembling norepinephrine. Thereexists extensive literature reports that indicate that I-131 MIBG has been usedover the last two decades as a therapeutic agent for the treatment ofpheochromocytoma, paraganglioma, neuroblastoma, carcinoid, and medullar thyroidcarcinoma.  The diagnostic use of I-131 MIBG is approved in Europe, theU.S. and Canada.  The therapeutic use of I-131 MIBG is approved in Europebut is investigational in the United States and Canada.  DRAXIMAGE manufactures the I-131 MIBG at itsfacility.

Regulatory Status - DRAXIMAGE will provide I-131 MIBG for two clinicaltrials approved by the FDA under a recently submitted Investigational New Drug(“IND”) application.  One trial is aPhase II study in which I-131 MIBG will be administered with intensivechemotherapy and autologous stem cell rescue for high-risk neuroblastomapatients.  The second trial is a Phase Istudy in which irinotecan and vincristine, two common chemotherapy agents, willbe administered in combination with I-131 MIBG to determine safety andtolerability in patients with resistant/relapsed high-risk neuroblastoma.

Both clinical trials will be coordinated by a group of eleven children’shospitals and two universities in the United States known as the New Advancesin Neuroblastoma Therapy (NANT) consortium. These two trials are continuations of earlier NANT studies.  They are expected to start in early 2007.  NANT member institutions are:

·                                          C.S. Mott Children’s Hospital, University ofMichigan — Ann Arbor, MI

·                                          Children’s Healthcare of Atlanta — Atlanta,Georgia

·                                          Children’s Hospital and Regional Medical Center— Seattle, WA

·                                          Children’s Hospital Boston, Dana-Farber CancerInstitute — Boston, MA

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·                                          Children’s Hospital Los Angeles — Los Angeles,CA

·                                          Children’s Hospital Medical Center —Cincinnati, OH

·                                          Children’s Hospital of Philadelphia —Philadelphia, PA

·                                          Children’s Memorial Hospital — Chicago, IL

·                                          Lucile Packard Children’s Hospital — Palo Alto,CA

·                                          Riley Hospital for Children, Indiana University— Indianapolis, IN

·                                          Texas Children’s Cancer Center, Baylor Collegeof Medicine — Houston, TX

·                                          University of California, San Francisco — SanFrancisco, CA

·                                          University of Wisconsin Comprehensive CancerCenter — Madison, WI

Competing Therapeutic Products - We also believe that AZEDRAÔ, being developed by Molecular Insight Pharmaceuticals, Inc. (“MIPI”)may compete with our DRAXIMAGEÒ I-131 MIBG product under clinicaldevelopment.  AZEDRAÔ has received Orphan Drug status and a Fast Track designation by theFDA.  According to information set forthin its website, MIPI is conducting a Phase I clinical trial with AZEDRAÔ in adults at Duke University. The initial target market for AZEDRAÔ is the treatment of metastatic neuroendocrinetumours such as pheochromocytoma, carcinoid and neuroblastoma that are notamenable to treatment with surgery or conventional chemotherapy.  Metastatic tumours are turmours that spreadto other organs or parts of the body.

#### *Technetium Generators*

DRAXIMAGE isdeveloping a “next-generation” version of a Technetium Generator, which is thesource of Technetium in virtually every radiopharmacy worldwide.  According to the Bio-Tech Report 250 (issuedin October 2006), entitled “The U.S. Market for Diagnostic Radiopharmaceuticals”,the generator market in the United States is currently estimated atapproximately US$160 million and is growing at 8% annually.  Nearly 90% of generators are located inradiopharmacies and the rest are in other institutions such as hospitals andclinics.

Technetium (Tc99m) is one of the most widely used radiopharmaceuticals. Due to its shorthalf-life, it has to be produced on site or nearby by generators shipped with alonger half-life mother isotope, the molybdenum (Mo99).  In other words, generators are used toproduce technetium on site at the hospital or radiopharmacy. A generatorconsists of a column loaded with Mo99, encased within lead shielding designedto provide protection from radiation.  Itcan typically provide Tc 99m for a period of approximately one week, dependingon the degree of usage by the radiopharmacy.

#### *Other Development Products*

#### *SOMATOSCAN*®*/SomatostatinTherapy*

Description - *SOMATOSCAN*® and Somatostatin Therapy areradiolabelled somatostatin peptides derived from a synthetic peptide based onMK-678, originally developed by Merck, which shows a high binding affinity forthe somatostatin receptors expressed in neuroendocrine tumors, lymphoma andcarcinoid and small-cell lung cancer. This peptide may be developed as both a diagnostic imaging agent (*SOMATOSCAN*®) and therapeutic product (Somatostatin Therapy) and we believethat it may permit the identification and treatment of primary tumors and thecorrect diagnosis of metastatic lesions. No substantial work related to *SOMATOSCAN**Ò* or Somatostatin Therapy was carried out in2005 or 2006.

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#### *Paclitaxel*

Description - Paclitaxel is a novel, anti-tumor agent referred to insome scientific and medical literature as “taxol.”  Paclitaxel is currently marketed in the U.S.under the brand name TaxolÒ by Bristol-Myers Squibb Company.  In January 1997, DRAXIS acquired from MylanLaboratories Inc. (“Mylan”) the exclusive Canadian marketing rights to theMylan formulation of paclitaxel.  In June1998, DRAXIS filed with the HPFBI a New Drug Submission in Canada forpaclitaxel, and the HPFBI has completed its review process.  Prior to approval, DRAXIS must comply withCanadian Patented Medicines Regulations with respect to genericcompetition.  Mylan is currentlyassessing the status of patent infringement litigation in Canada regardingpaclitaxel, and the Company has agreed to defer launch in Canada until suchissues have been clarified.

Under the agreement, DRAXIS and Mylan will share the profits frommarketing and selling paclitaxel in Canada according to a formula agreed tobetween the parties.

### Manufacturing

#### *Radioactive Products*

DRAXIMAGE manufactures its radioactive products in its cGMP compliantmanufacturing facility located in Kirkland, Québec supported by a full qualitycontrol department licensed by regulatory agencies in Canada and the U.S.

In 2001, DRAXIMAGE completed the expansion of its radiopharmaceuticalproduction area in anticipation of increasing sales volumes of itsradiopharmaceutical line in the U.S. and other markets.  This expansion has approximately doubled thesize of the original facility to 19,000 square feet.

Most of the radioisotopes used to produce radiopharmaceuticals aresupplied to DRAXIMAGE primarily, but not exclusively, by MDS Nordion, asubsidiary of MDS Inc. (NYSE: MDZ; TSX: MDS) and one of the world’s largestsupplier of chemical-grade isotopes for use as medical radioisotopes.

A key distinguishing characteristic of the radiopharmaceuticals businessis the need for a sophisticated logistics system.  Radiopharmaceuticals, by their nature, decaycontinually over time, thereby losing their potency.  Therefore, manufacturing and product deliverysystems must be well coordinated to ensure that the level of radioactivitypresent in the product supplied to the physician is correct at the time ofadministration.

#### *Lyophilized Products*

DRAXIMAGE’s Tc-99m Kits are currently manufactured by DRAXIS Pharma inits Kirkland, Québec facility, which was first accepted as a manufacturing siteby the FDA in October 2001.  Subsequentmanufacturing site transfer approvals for the Tc-99m Kits were received duringthe period December 2001 to March 2002.

*Regulatory*

In the period December 2001 through March 2002, DRAXIMAGE was approvedby the FDA to transfer production of its line of lyophilized medical imagingproducts in-house to the DRAXIS Pharma lyophilization production facility.

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In January 2003, DRAXIMAGE received FDA approval to produce and market anew radiotherapeutic kit product for the preparation of Sodium Iodide I-131Capsules and Oral Solution.

In March 2004, DRAXIMAGE received FDA approval to produce and market anew formulation of MDP called MDP-25, a diagnostic product for preparing askeletal imaging agent.

In November 2004, DRAXIMAGE received FDA approval for a DRAXIMAGE brandof I-131 therapeutic capsules.

In September 2005, MDP-25 was approved by Health Canada but is notcurrently sold by DRAXIMAGE.

In November 2005, DRAXIMAGE announced it had received FDA approval for anew larger format version of its I-131 kit for the preparation of Sodium IodideI-131 Capsules and Oral Solution. DRAXIMAGE introduced this product in the U.S. market in January 2006.

In January 2006, DRAXIMAGE announced it had received approval from theFDA for its supplemental new drug application for Sodium Iodide I-131 CapsulesUSP, Diagnostic-Oral.  These diagnosticSodium Iodide I-131 capsules are intended to be used by physicians to performthe radioactive iodide (RAI) uptake test to evaluate thyroid function prior totreatment with stronger therapeutic doses of Sodium Iodide I-131.  Diagnostic doses of Sodium Iodide I-131 mayalso be employed in localizing metastases associated with thyroidmalignancies.  We introduced the newdiagnostic capsules in the U.S. market in May 2006.

In November 2006, DRAXIMAGE announced it had been approved by the FDA torun two clinical trials using radioactive Iobenguane I-131 Injection (alsoknown as 131I-metaiodobenzylguanidine, or I-131 MIBG) to treat high-riskneuroblastoma, a rare form of cancer that affects mostly infants and young children.  See “Products under Development”.

DRAXIMAGE has a strong regulatory track record.  This includes 2 successful audits of ourfacilities in 2006 (1 regulatory inspections and 1 client audits) and 4successful audits of our facilities in 2005 (2 regulatory inspections and 2client audits).

### Sales andMarketing

At the present time, DRAXIMAGE’s products are marketed primarily in theU.S. and Canada.  As many of the productsmarketed by DRAXIMAGE have the potential for global approvals, it is expectedthat non-North American based revenues will increase in the future.  The most active growth areas are expected tobe U.S. and Europe.  In January 2003,DRAXIMAGE entered into a marketing and distribution agreement withNetherlands-based IDB Holland B.V. for the Benelux countries.

#### *United States*

DRAXIMAGE sells Tc-99m Kits in the U.S. to several customers anddistributors including Cardinal Health, Inc., which operates the largest chainof radiopharmacies, Mallinckrodt Inc., a division of Tyco Healthcare, GE Healthcare,United Pharmacy Partners Inc. and large university hospitals.

Tc-99m Kits sold in the U.S. are marketed under the DRAXIMAGE trademark.

On February 2, 2007, DRAXIMAGE announced it had submitted an ANDA to theFDA for its generic kit for the preparation of Tc-99m Sestamibi for injection(DRAXIMAGEÒ Sestamibi), a nuclear

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medicineimaging agent used in myocardial perfusion imaging (“MPI”) to evaluate bloodflow to the heart in patients undergoing cardiac tests.

According to AMR/Arlington Medical Resources, in 2005 there were morethan 7 million cardiac studies conducted in the U.S. out of a total of over 15million nuclear medicine procedures, making MPI the most widely performednuclear medicine scan.  Recent marketresearch indicates that existing MPI products generate revenues in excess of$500 million annually in the U.S. and that the imaging agent most often used inconducting MPI procedures is sestamibi labeled with the radioactive isotopeTechnetium-99m (“Tc-99m Sestamibi”).

The sestamibi kit is used in nuclear medicine imaging to show how wellthe heart muscle (myocardium) is supplied with blood (perfused) both at restand during strenuous activity.  Theradioisotope Technetium-99m is attached to the sestamibi molecule formingTc-99m Sestamibi.  When injected into thebloodstream this radiopharmaceutical agent is distributed throughout the heartmuscle in proportion to the blood flow received by various portions of theheart.  Heart images are then obtainedusing a gamma camera that can detect the Technetium-99m.  Two sets of images are typically taken, onewhile the patient is at rest and a second set while the patient is understress, often by exercising on a treadmill or stationary bicycle.  The resulting two sets of images are comparedwith each other to diagnose the presence of coronary heart disease by detectingareas of the heart that may not be receiving normal blood flow.  This imaging technique is known as cardiacstress testing or myocardial perfusion imaging (MPI).

Once its product is approved, DRAXIMAGE plans to enter the MPI marketafter the key patent for the currently marketed Tc99m Sestamibi productexpires, which is expected to be in 2008 for the United States.  DRAXIMAGE also plans to file for marketingapprovals in other jurisdictions, including European countries and Canada.

#### *Canada*

In Canada, DRAXIMAGE currently markets most of its products directly toend-users through a co-operative agreement with Bristol-Myers Canada, pursuantto which Bristol-Myers Canada’s sales force promotes the non-competitiveproduct lines of each party.  Thisdistribution agreement terminates on December 31, 2007 and has not beenrenewed.  As of January 1, 2008,DRAXIMAGE intends to market its products in Canada directly and throughnon-exclusive distributors.

For many years, DRAXIMAGE has been the primary Canadian supplier ofIodine-131 and Iodine-125 labeled radiopharmaceuticals, including solutions andcapsules used primarily for the diagnosis and treatment of thyroid glanddisorders.

#### *Europe*

The radiopharmaceutical market in Europe is characterized by strongregional fragmentation, which gives the leading market share to the individualmanufacturer located in each of the major countries (e.g. GE Amersham Health inthe UK, Tyco Healthcare in Holland and CIS Bio in France).  DRAXIMAGE’s marketing activities in Europeare at their earliest stages pending regulatory approvals in thisjurisdiction.  As of December 31, 2005,DRAXIMAGE had five regulatory submissions filed with European regulatory authorities:four with the Medicines Evaluation Board in the Netherlands and one with theDanish Medicines Agency.  The submissiondates for these radiopharmaceutical products range from June 2003 to December2004.  All of the approvals sought byDRAXIMAGE in Europe are for marketing authorizations through the mutualrecognition procedure which involves obtaining approval in one state (the “referencemember state”) and recognition of that approval in other member states.  All of

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theapprovals being sought in Europe are for radiopharmaceutical products alreadyapproved in Canada or the U.S.  Two of these five Europeansubmissions were for DRAXIMAGE’s kit for the Preparation of Technetium Tc-99mAlbumin Aggregated Injection (MAA Kit) for which DRAXIMAGE received approval inone reference member state, the Netherlands, in February 2005 and for thePreparation of Technetium Tc-99m MethyleneDiphosphonic Acid Injection (MDP Kit)for which DRAXIMAGE received approval in one reference member state, theNetherlands, in March 2006.

DRAXIMAGE has concluded one distribution agreement in respect of theBenelux countries, with Netherlands-based IDB Holland B.V.  DRAXIMAGE is seeking to expand itsdistribution network in Europe through strategic alliances with commercialpartners.

### Research andDevelopment 

DRAXIMAGE conducts both basic research on its own products anddevelopment work on in-licensed products and technology developed by otherfirms, predominantly in the biotechnology field.  DRAXIMAGE applies its chelating expertise andtechnologies to link these compounds with radioisotopes to create innovativediagnostic and therapeutic radiopharmaceuticals.

In October 2003, DRAXIMAGE received a U.S. patent for a new family ofchelating compounds that have significant potential for the development ofimaging and radiotherapeutic agents to diagnose and treat diseases, includingcancerous tumors or metastases.  Webelieve that the new family of chelating compounds will permit the discovery ofdiagnostic imaging agents to visualize important biological receptors orreceptor-positive tumors when combined with gamma-emitting radioisotopes.  We believe that the compounds are alsopotentially useful as therapeutic radiopharmaceuticals for the in-vivo treatmentof tumors and metastases.

DRAXIMAGE is also able to provide labeling technology for othercompanies for use with monoclonal antibodies and peptides.  We are also working on the development ofnovel therapeutic uses of radioactivity.

DRAXIMAGE personnel have extensive experience developing and optimizingformulations applicable to the lyophilization manufacturing processes used inthe production of cold Tc-99m Kit products.

### Employees

As at December 31, 2006, DRAXIMAGE had 87 employees (representingapproximately 17% of the Company’s employees), consisting of 9 generalmanagement and administration employees, 12 marketing, selling and customerservice employees, 20 quality operations employees, 36 manufacturing employees,and 10 research and development employees. None of these employees is unionized.

### Patents

Most of DRAXIMAGE’s products are covered by patents held by DRAXIMAGE orlicensed from third parties.  DRAXIMAGEhas numerous patents issued and allowed and patent applications pending in theUnited States, Canada, Europe and Japan. For example, DRAXIMAGE has various U.S. issued patents related tochelates for radiopharmaceutical applications and process patents for thepreparation of certain radiopharmaceuticals. The patents held by DRAXIMAGE have expiry dates ranging from November2008 to December 2021.  In addition,DRAXIMAGE has licensed from BTG International Limited (formerly known as theBritish Technology Group) certain U.S. patents covering its *INFECTON*Ò product.

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DRAXIMAGE also relies on trade secrets, know-how and other proprietaryinformation to protect its current products and technologies.  To protect DRAXIMAGE’s rights in these areas,it requires all licensors, licensees, customers and significant employees toenter into confidentiality agreements. There can be no assurance, however, that these agreements will providemeaningful protection to DRAXIMAGE’s patents, trade secrets, know-how or otherproprietary information in the event of any unauthorized use or disclosure ofsuch patents, trade secrets, know-how or other proprietary information.

**Other Collaboration Agreements**

We have continuing financial interests associated with our collaborationagreements with Pfizer with respect to *ANIPRYL*® andwith Shire with regard to Canadian sales of products divested in 2003.  As of January 31, 2005 all deferred revenuerelated to the SpectroPharmÒ line of products from GSK was fully amortizedby the Company.

*ANIPRYL*®

Beginning in 1990, we expanded on our knowledge and experience withselegiline by initiating directly on our own behalf, as well as throughcontract research arrangements, studies designed to investigate the potentialof selegiline for companion animal use. This initiative ultimately resulted in the formation of our subsidiaryDAHI, through which the Company developed and commercialized a companion animalhealth product, *ANIPRYL*®.

*ANIPRYL*® is aselegiline product developed for use in veterinary prescriptive applications,particularly in dogs.  The twoindications for which *ANIPRYL*® iscurrently approved are canine Cushing’s disease and canine cognitivedysfunction syndrome (“CDS”).

Cushing’s disease refers to increased blood cortisol and the presence ofone or more typical clinical signs, such as change in appetite, obesity,frequent urination, abdominal distension, loss of hair, lethargy and otherbehavioral changes.  Canine Cushing’sdisease is the form of the disorder that is due to primary hyperfunction of thepituitary gland.

CDS, sometimes known as “Old Dog Syndrome,” refers to the onset inelderly dogs of behavioral problems unrelated to a generalized medicalcondition such as neoplasia, infection or organ failure.  Typical signs of this disorder can includeconfusion, disorientation, decreased activity, changes in sleep/wake cycles,loss of house training and loss of interest in or ability to interact with itsowner and environment.

From March 1991 to November 1996, DAHI’s common shares were publiclytraded on NASDAQ.  In November 1996, theCompany took DAHI private in a mandatory share exchange transaction.

In December 1997, we entered into an alliance with Pfizer whereby Pfizerwas granted a perpetual exclusive license to market, sell and distribute *ANIPRYL*® in exchange for non-refundable fees, royaltiesbased on the worldwide sales of *ANIPRYL*®, amanufacturing and supply agreement and a research collaboration.

In December 1999, the Company and Pfizer amended the terms of thealliance (the “First Amendment”) whereby $9.0 million of potential additionalnon-refundable fees were eliminated in exchange for the Company receivingadditional regulatory support for a potential new indication and additionalmanufacturing data.  These potentialadditional non-refundable fees would have become

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payableif Pfizer had exercised its rights to acquire product registrations followingregulatory approval of *ANIPRYL*® indesignated European countries.

In April 2001, we received a payment of $1.5 million with respect tominimum royalty entitlements for the first three-year period ended December 31,2000.

In December 2001, the Company and Pfizer further amended the term of thealliance (the “Second Amendment”) whereby the Company received a payment of$3.1 million with respect to minimum royalty entitlements for the second andthird three-year periods ended December 31, 2001 and 2002 and modifications tofuture royalty entitlements.  The SecondAmendment also resulted in all rights to *ANIPRYL*®outside of North America reverting back to the Company, forfeiture of anyadditional minimum royalty entitlements and the termination of any futurecollaborative research on new indications or formulations for *ANIPRYL*®.

Cumulatively to December 31, 2006, we received a total of $28.1****million in non-refundable fees and $17.4****million in royalties and royalty-related payments relatingto *ANIPRYL*Ò.

Under the amended arrangement, we will not be entitled to receive anyadditional non-refundable fees but will continue to earn royalties on Pfizer’ssales of *ANIPRYL*® in the United States andCanada.  The $28.1 million ofnon-refundable fees already received from Pfizer have been deferred and wererecognized as revenue on a straight-line basis over the period to December 31,2006 in conformity with Staff Accounting Bulletin No. 101 published by the U.S.Securities and Exchange Commission.  Theamortization of these deferred revenues terminated on December 31, 2006.

We currently do not intend to pursue any additional or expandedindications for *ANIPRYL*®.

*ANIPRYL*® iscurrently approved for sale in Canada, the United States, Australia, UnitedKingdom, New Zealand and Brazil. However, *ANIPRYL*® is not currently sold inAustralia, New Zealand, the United Kingdom or Brazil.

In 1997, DAHI filed for regulatory approval of *ANIPRYL*®in Europe by using the decentralized procedure. This procedure allows DAHI to file the *ANIPRYL*®submission in a country of its choice, and to designate five additional memberstates of the European Union as the countries that will review and approve theregulatory submissions.  DAHI chose theUnited Kingdom as the country in which to file the initial *ANIPRYL*®applications.  In July 2003, DAHIreceived authorization from the Veterinary Medicines Directorale (“VMD”) tomarket *ANIPRYL*® tablets for dogs in the UnitedKingdom.  The United Kingdom submissionhas been reformatted in order to be suitable for submission to other EuropeanUnion member states.  The VMD has actedas DAHI’s advocate in this procedure.

### Sales andMarketing

Under the terms of the amended arrangement, Pfizer will continue tomarket and sell *ANIPRYL*® in the United States andCanada.

In July 2003 DRAXIS granted Ceva Santé Animale S.A. (“CEVA”) anexclusive license for Europe for the marketing and distribution of *ANIPRYL*®.

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### Manufacturing

DAHI’s primary supplier of selegiline for the production of *ANIPRYL*® is Chinoin Pharmaceutical and Chemical Works Co.Ltd (“Chinoin”).  In 1995, DAHI developedthe data required to qualify an alternative source of supply for selegiline,and the BVA and the FDA have accepted the data.

Under its supply agreement with Pfizer, DAHI is entitled to designate athird-party supplier or to manufacture *ANIPRYL*® itselfin a qualified facility.

During 2000, Pfizer qualified one of its own facilities to manufacture *ANIPRYL*® for the North American marketplace.  During 2000 and up to the second quarter of2005, Pfizer manufactured *ANIPRYL*®.

Since the second quarter of 2005, DRAXIS Pharma manufactures *ANIPRYL*® at its manufacturing facilities in Kirkland,Québec.

### Competition

The animal health marketplace is generally served by veterinary,agricultural or animal health divisions of large international pharmaceuticaland chemical companies that are involved in research and developmentactivities.  Products resulting fromtheir activities may, in the future, compete directly with *ANIPRYL*®.

We are not aware of any other HPFBI, BVA or FDA approved productavailable at this time that competes directly with *ANIPRYL*®.  In the United States, the 1988 generic animaldrug law offers marketing protection from veterinary generic applicants in theUnited States for a period of five years. This period ended in 2002, in the case of *ANIPRYL*®.  However, that law does not prevent othercompanies from repeating the full clinical New Drug Application process to seekFDA approval for a bio-equivalent product, nor does it prohibit human genericversions of *ANIPRYL*® from being sold toveterinarians.  Any such competitor,including sellers of a human or veterinary generic selegiline, would be subjectto DAHI’s U.S. and international patent rights.

No significant competition for *ANIPRYL*® hasbeen experienced to date in Canada or the United States from products approvedfor veterinary or human use.  However,there are two other treatments available that have not been approved in Canadaor the United States to treat canine Cushing’s disease, that we believe may bebeing used off-label for canine Cushing’s disease:  *LYSODREN*® (mitotane) by Bristol-Myers SquibbCo., which was approved for use in the treatment of human inoperable cancer ofthe adrenal gland and *NIZORAL*® (ketoconazote) tablets by Johnson& Johnson, Inc., an anti-fungal medication, which was approved for thetreatment of various internal and external fungal and yeast infection inhumans.  These competitive treatmentswork by selectively killing the outer layer of the adrenal gland, therebylimiting production of corticosteroid. The human generic version of *ELDEPRYL*® isnot approved for the treatment of canine Cushing’s disease or CDS in Canada,the United States or elsewhere.  However,we believe that such use of human selegiline may compete with the use of *ANIPRYL*® in dogs.  Thedosage required for dogs suffering from canine Cushing’s disease and CDS, inmost cases, is much higher than the human 5mg dose for selegiline.

Patents for the use of *ANIPRYL*® forthe treatment of dogs with conditions including canine Cushing’s disease andCDS are issued in Canada, the United States and other jurisdictions.  We believe DAHI is positioned to enforce itsproprietary patent rights and defend itself against infringement by otherparties.

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### Patents

InSeptember 1992, the United States Patent and Trademark Office issued a patentto DAHI entitled “Use of l-deprenyl for Retention of Specific PhysiologicalFunction.”  The patent claims specificuses of l-deprenyl for use in treating dogs and covers currently sold products.  Similar patents have also issued to DAHIin many foreign jurisdictions, including Canada, New Zealand, Venezuelaand Europe.  Six additional U.S.patents have also issued to DAHI.  These patents cover various veterinarypharmaceutical uses of l-deprenyl such as treatment of Cushing’s Disease,weight loss, treatment of immune system dysfunction, extension of lifeexpectancy of dogs, and treatment of hearing loss.  Four of these six patents were also filed inforeign countries that have major companion animal markets.  The markets for the cognitive disease patentsare Canada, U.S., Europe, Japan, Mexico, Venezuela, New Zealand andMalaysia.  The markets for the Cushing’sDisease patent are Europe, Canada and the U.S. The markets for the survival cure shifting patent are Canada, Norway,Finland and Europe.  The markets for thetreatment of hearing loss patent are Japan and Canada.  The patents held by DAHI have expiry datesranging from August 31, 2010 to June 3, 2016.

The European CDS patent was subject to an opposition procedure initiatedby Ceva.  Ceva holds patents in theUnited States, Canada and Europe relating to the use of selegiline for treatingbehavioral disorders with change of mood in dogs and cats.  Ceva’s European patent was subject to anopposition procedure by DAHI.  In July2003, DRAXIS and Ceva agreed to discontinue the opposition proceedings betweenthem before the EPO.  DRAXIS also grantedCeva an exclusive license for Europe for the marketing and distribution of *ANIPRYL*® or the use of *ANIPRYL*®claims.  In return, Ceva agreed to payDAHI a percentage royalty on European sales of *ANIPRYL*®and/or the use of *ANIPRYL*® claims, in addition tonominal milestone payments upon the regulatory approval of *ANIPRYL*®in the UK and in subsequent additional jurisdictions within the EuropeanCommunity.  The agreement also gave DAHIthe rights to use Chinoin selegiline in any jurisdiction.

*SpectroPharm*®*Product Line*

In May 2000, we entered into an arrangement with Block Drug Company(Canada) Limited, now part of GlaxoSmithKline Consumer Healthcare, with respectto the SpectroPharm® line of non-prescription dermatology products, whichincluded the sale of product rights by the Company in exchange for anon-refundable fee, the acquisition of inventory on hand, a supply agreementand a technical services arrangement. The $9****million we received with respectto the SpectroPharm® product rights was deferred and was recognized as revenueon a straight-line basis over the period to January 31, 2005.  As of January 31, 2005, all deferred revenuerelated to the SpectroPharmÒ line of products was fully amortized.

## **DiscontinuedOperations (DRAXIS Pharmaceutica)**

In July 2003, we completed the divestiture of ourCanadian pharmaceutical sales and marketing division, DRAXIS Pharmaceutica,with the sale to Shire of substantially all remaining products of the division,including the Canadian product rights for Alertec®, Diastat®, Hectorol®,Permax® and Zanaflex®.  Shireagreed to pay DRAXIS through a combination of cash and contingent milestonepayments plus royalties on future product sales.  We have received $9.6 million in cash fromShire and could receive up to an additional $2.9 million in market-drivencontingent milestones****over thenext several years.  In addition, Shireassumed responsibility for the financial provisions of the license agreementrelated to Permax®.  This transaction is in addition to the $6.5million received by DRAXIS in March 2003 from affiliates of Elan for the returnof Canadian rights for several of Elan’s neurology products that had notachieved regulatory approval in Canada.

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## **GovernmentRegulation**

Our business is governed by a variety of industry-specific statutes andregulations in Canada, the United States and other countries.

**DRUGS**

### Drug ApprovalProcess

#### *Human Pharmaceuticals*

In Canada, pharmaceutical research, development and marketing activitiesare regulated by the Food and Drugs Act (Canada) and the rules, regulations,policies and guidelines made thereunder. The Food and Drugs Act (Canada) is administered by the TherapeuticProducts Directorate of the Health Products and Food Branch (“TPD”), whichregulates the use and sale of diagnostic and therapeutic products inCanada.  In the United States, theseactivities are regulated under laws administered by the Food and DrugAdministration (“FDA”), which also have a significant impact on the Company’sactivities.

The drug research and development process consists of both pre-clinicaland clinical phases.  The pre-clinicalphase consists of screening compounds to identify the most promising leads forcontinued drug development prior to human clinical trials and evaluating thedrug’s toxic and pharmacologic effects to show that the drug is reasonably safefor use in the initial clinical studies. The clinical phase involves clinical trials with healthy participants,as well as patients with specific diseases or conditions.

Before commencing clinical trials in Canada or the United States, aClinical Trial Application (“CTA”) must be submitted with the TPD (in theUnited States an Investigational New Drug (“IND”) application must be submittedwith the FDA).  The CTA or INDapplication includes manufacturing data, pre-clinical data, information aboutuse of the drug in humans for other purposes and a detailed protocol for theconduct of clinical trials.

In Canada and the United States, clinical trials of new pharmaceuticalproducts involve three phases.  In PhaseI, the product’s safety is assessed during clinical trials involving a limitednumber of healthy volunteers or patients. In Phase II, the product’s efficacy, dosage and safety are tested on asmall number of patients with a known disease. In Phase III, controlled clinical trials are conducted in which theproduct is administered to a larger number of patients with a known disease,and further information relating to safety and efficacy is gathered.  Further, in Phase III, the effectiveness ofthe product is, in certain cases, compared to that of accepted methods oftreatment.  If clinical studies establishthat the product has value, an applicant files a New Drug Submission with theTPD (or a New Drug Application, or Product License Application or BiologicLicense Application (for biological products) with the FDA) to obtain marketingapproval for the product.  The New DrugSubmission/New Drug Application/Product License Application/Biologic LicenseApplication includes a comprehensive summary and analysis of the results of theclinical trials, information relating to proposed labeling and packaging materials,and data relating to the proposed manufacturing and quality controlprocedures.  If the New DrugSubmission/New Drug Application/Product License Application/Biologic LicenseApplication is found to be satisfactory, a marketing authorization is issued(in Canada, the TPD issues a Notice of Compliance).

The process of completing clinical trials and obtaining regulatoryapprovals for a new drug will, in general, take a number of years and requirethe expenditure of substantial resources. Once a New Drug Application/New Drug Submission or Product LicenseApplication/Biologic License Application is submitted, there can be noassurance that the TPD or FDA will review and approve the application in a

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timelymanner.  In certain limitedcircumstances, the TPD will permit a New Drug Submission to be subject to apriority review.  The TPD’s PriorityReview Process allows for a faster review to make available promising drugproducts for a serious, life-threatening or severely debilitating illness orcondition for which there is substantial evidence of clinical effectivenessthat the drug provides: (i) effective treatment, prevention or diagnosis of adisease or condition for which no drug is presently marketed in Canada; or (ii)a significant increase in efficacy and/or significant decrease in risk suchthat the overall benefit/risk profile is improved over existing therapies,preventatives or diagnostic agents for a disease or condition that is notadequately managed by a drug marketed in Canada.

Even after initial approval has been obtained, further studies,including post-marketing studies, may be required to provide additional data onsafety necessary to gain approval for the use of the product as a treatment forclinical indications other than those for which the product was initiallytested.  The TPD and FDA may also requirepost-marketing surveillance programs in order to monitor long-term risks andbenefits of the drug, to study different dosages or evaluate different safetyand efficacy parameters.  Results ofpost-marketing studies may limit or expand the further marketing ofproducts.  A serious safety oreffectiveness problem involving an approved new drug may result in TPD or FDAaction requiring withdrawal of the product from the market and possible civilaction.

The Special Access Program of the TPD provides practitioners with accessto pharmaceutical, biologic and radiopharmaceutical products that are not yetapproved for sale in Canada to treat patients with serious or life-threateningillness or conditions when conventional therapies have failed, are unsuitableor unavailable.  The FDA administers asimilar program in the United States to treat patients with immediatelylife-threatening diseases.

Outside of Canada and the United States, the regulatory approval processfor the manufacture and sale of pharmaceuticals varies from country to country,and the time required may be longer or shorter than that required for TPD orFDA approval.  To the extent it chooses toexplore foreign markets, the Company may rely on foreign licensees to obtainregulatory approval for marketing its products in foreign countries.

#### *Veterinary Pharmaceuticals*

In Canada, the drug approval process for veterinary pharmaceuticals issimilar to the process for obtaining approvals for human pharmaceuticals.  To receive regulatory approval, a new animaldrug must successfully complete a number of developmental phases which includethe establishment of safety and efficacy in target species, establishment ofmanufacturing procedures and the conduct of controlled clinical trials in whichthe drug is administered to a large number of animals in order to gatherfurther information relating to safety and efficacy.

Following the completion of clinical trials, an applicant files a NewDrug Submission to the Veterinary Drugs Directorate.

### Drug Marketing

#### *Human Pharmaceuticals*

Prescription drug products generally are made known to healthcareprofessionals through advertisements and visits to such professionals, known as“detailing.”  In Canada, unlike theUnited States, product-specific advertising to the general public is generallynot permitted, subjected to very limited exceptions.

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An increasing percentage of sales of prescription pharmaceuticalsrelates to sales of products which are paid for, in whole or in part, bygovernment or private insurance drug plans. In many jurisdictions, governments have established regimes to control drugpricing at the retail pharmacy level. Most Canadian provinces have implemented drug benefit formularies.  A formulary lists the drugs for which aprovincial government will reimburse qualifying persons and the prices at whichthose drugs will be reimbursed.  Althoughthere is not complete uniformity among provinces, generally speaking,provincial governments will reimburse an amount equal to the lowest availableprice of the generic versions of any drug listed on the provincial formulary.  The legislative regimes of most provincesalso permit generic drug substitution, even for patients who do not qualify forgovernment reimbursement.  The effect ofthese initiatives is to encourage the sale of lower-priced generic versions ofpharmaceutical products.  In the UnitedStates, beginning in 2006, Medicare beneficiaries will be offered aprescription drug benefit.  Medicare willcontract with at least two risk-bearing drug plans in each of 34 regions toprovide the new benefit.  Theprescription drug plans will cover at least two drugs in each therapeutic classor category of covered drugs, but may establish formularies and tiered-costamounts.  The prescription drug plans maylimit their coverage to two drugs in each therapeutic class or category ofcovered drugs.  The effect of this newprogram will allow prescription drug plans to negotiate price discounts andrebates with drug companies.

Furthermore, there have been, and the Company expects that there willcontinue to be, an increasing number of proposals to implement government andother third-party payer restrictions on the pricing of prescriptionpharmaceuticals as a result of continuing efforts to contain or reduce thecosts of healthcare throughout North America. See Item 3:  Key Information -Risk Factors.  Notably, in Canada, thePatented Medicines Prices Review Board (“PMPRB”) sets the maximum price thatcan be charged for a patented drug (see discussion below on Patent Protectionand Price Controls).

#### *Veterinary Pharmaceuticals*

In Canada, veterinary “prescription” pharmaceuticals are available onlythrough veterinarians.  Veterinaryprescription drugs are generally promoted by manufacturers throughadvertisements to veterinarians and sales visits to animal health clinics.  In Canada, unlike the United States,product-specific advertising to the general public is generally not permitted,subjected to very limited exceptions.

The PMPRB has the jurisdiction to regulate maximum pricing of veterinarydrugs (see below).  There are nogovernment reimbursement plans in the veterinary pharmaceuticalmarketplace.  There are a few private petinsurance plans; however, these plans do not cover a significant portion of thepurchase for veterinary drugs. Accordingly, the veterinary marketplace is not subject to the same costcontainment measures that are prevalent in the human pharmaceutical market.

### PatentProtection and Price Controls

Companies that have invented human or veterinary drugs can apply forpatent protection virtually worldwide, subject to strict rules relating totiming, subject matter and the scope of protection sought.  Patents can cover many aspects of apharmaceutical product, including the drug itself, processes for preparing thedrug, delivery systems and new uses for the drug.  Patents do not, however, guarantee that theowner of the patent or its licensee can utilize the patented invention becausethere may be pre-existing patent rights owned by a third party.  While a patent permits the owner or itslicensee to prevent others from doing what is covered by the patent,competitors are always free to market products that do not infringe theparticular patent, provided such competitors otherwise comply with healthregulatory requirements.

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Historically, pharmaceutical companies have relied heavily upon patentsto protect proprietary positions in respect of drug products.  The Company’s policy is to protect itstechnology, inventions and improvements by, among other things, filing patentapplications for technology it considers important to the development of itsbusiness.  The Company also relies upontrade secrets, know-how and licensing opportunities to develop and maintain itscompetitive position.

Under United States patent law, a patent is issued to the person whomade the invention first, rather than to the first person to file anapplication therefor, as is common in other countries, such as Canada.  Consequently, in determining who is entitledto a United States patent for a particular technology, it is important toconsider that it is possible for an inventor to establish an entitlement basedon a prior invention, notwithstanding an earlier filed patent application.  Priorinvention may not be established before December 8, 1993, in a NAFTA countryother than the United States, or before January 1, 1996, in a WTO membercountry other than a NAFTA country.

Remedies for patent infringement are created under the laws of Canadaand the United States.  In addition tothe standard legal action for patent infringement, in 1993, the CanadianGovernment enacted Regulations under the Patent Act (Canada) whereby a companyproposing a generic version for a drug which has been marketed in Canada undera Notice of Compliance and in respect of which patents have been listed on thePatent Register, must address those patents before a Notice of Compliance maybe granted.  The originator of the drugmay apply to the Federal Court of Canada for an order prohibiting the Ministerof National Health and Welfare from issuing a Notice of Compliance until theissue of possible patent infringement has been resolved.  Similar proceedings are available in theUnited States if a generic drug manufacturer seeks approval for a drug inrespect of which patents have been listed in the Orange Book (the United Statesequivalent of the Patent Register).

As mentioned above, in Canada, the PMPRB monitors and controls prices ofdrug products marketed in Canada by persons holding, or licensed under, one ormore patents relating to those drug products. The PMPRB approves the introductory price of a drug product (based on acomparative analysis) and requires that subsequent price increases do notexceed the annual increase of the Canadian Consumer Price Index.  Thus, in Canada, the existence of one or morepatents relating to a drug product, while providing some level of proprietaryprotection for the product, also triggers a governmental price control regimewhich significantly impacts on the Canadian pharmaceutical industry’s abilityto set pricing.

### DrugManufacturing

Pharmaceutical companies are required to submit as part of their NewDrug Submission in Canada, or as part of their New Drug Application in theUnited States, detailed descriptions regarding the proposed manufacturing andpackaging process and the identities of the manufacturers in respect of aparticular drug.  A decision tomanufacture or package products in a facility other than that originallyapproved under the New Drug Application or New Drug Submission (as may be thecase with contract manufacturing outsourcing) requires notification of theregulatory authorities and can result in significant delays in production.

Pharmaceutical manufacturing facilities are subject to strict qualitycontrol standards including current good manufacturing practices (“cGMPs”).  Production processes within a facility aresubject to one-time validation testing, as well as periodic review.  In the case of sterile product manufacturing,including lyophilized products, the standards are even higher than for themanufacturing of non sterile products. The manufacture of radioactive drugs is subject not only to cGMPs butalso the environmental safety, handling and transportation requirements of theCanadian Nuclear Safety Commission (“CNSC”) and the United States NuclearRegulatory Commission (“NRC”).  There areno issues with respect to

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radioactivewaste disposal since all of the isotopes used in nuclear medicine areshort-lived and can be easily stored on site until decayed and then disposedof.

The FDA, HPFBI, CNSC and NRC conduct regular audits of the Company’sfacilities to ensure compliance with cGMPs and other statutoryrequirements.  See Item 3: KeyInformation - Risk Factors.

**ENVIRONMENTALLAWS**

Canadian and U.S. federal,state, local and provincial regulations govern extensively the use, manufacture,storage, handling, transport and disposal of hazardous materials and associatedwaste products.  The Company is not awareof any material environmental issues that affect the Company’s utilization ofits assets.  As of December 31, 2006, theCompany has not received any notice stating that it is not in compliance withenvironmental legislation applicable to it.

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**ORGANIZATIONALSTRUCTURE**

The following chart illustrates the corporate organization andjurisdictions of the Company and its significant affiliates as at March 30,2007.

All of the below-depictedcompanies are wholly owned subsidiaries of DRAXIS Health Inc.
|  |
|--|

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(1) DRAXIS Specialty Pharmaceuticals Inc. has twodivisions, DRAXIMAGE (radiopharmaceuticals) and DRAXIS Pharma (contractmanufacturing).

**PROPERTY,PLANTS AND EQUIPMENT**

Our sole operating facility is a 247,000-square-foot pharmaceuticalmanufacturing facility which houses the DRAXIMAGE and DRAXIS Pharmaoperations.  The facility is owned byDRAXIS Specialty Pharmaceuticals Inc., a wholly-owned subsidiary of the Companyand is located at 16751 Trans-Canada Road, Kirkland, Québec, Canada, H9H4J4.  See “Risk Factors — Risks Relatedto our Company — Our Manufacturing Operations are Concentrated in One Location”.  Factors beyond our control could cause aninterruption in our manufacturing operations, which could adversely affect ourreputation in the market place and our results of operations”.

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We believe that the above-noted property is suitable and adequate forits business purposes as presently contemplated.  We have an undrawn credit line issued by ourprincipal bankers, the National Bank of Canada who have a first rankingmortgage on all of our assets.  However,as of March 30, 2007, we had no third-party debt outstanding.

**Item 4A Unresolved Staff Comments**

None.

**Item 5.    Operating and Financial Review and Prospects**

The following discussion and analysis of the financial condition andresults of operations of DRAXIS Health Inc. (the “Company”) should be read inconjunction with the Company’s audited consolidated financial statements forthe referenced periods and notes thereto.

All amounts referred to herein are expressed in U.S. dollars and are inaccordance with U.S. generally accepted accounting principles (“GAAP”), unlessotherwise indicated.  Other noteworthyaccounting issues are discussed under “Accounting Matters”.

Readers are cautioned not to place undue reliance on forward-lookingstatements contained in the following Operating and Financial Review and Prospectssince actual results could differ materially from what we expect if known orunknown risks affect our business or if an estimate or assumption turns out tobe inaccurate.  Unless otherwise requiredby applicable securities laws, the Company disclaims any intention orobligation to update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise.  See “**Forward-LookingStatements**” on page 78 hereof.

The discussion and analysis contained in the following Operating andFinancial Review of Prospects are as of February 23, 2007.

**Overview**

DRAXIS is a specialtypharmaceutical company providing pharmaceutical products in three majorcategories: sterile, including sterile lyophilized (freeze-dried)pharmaceuticals; non-sterile specialty pharmaceuticals, andradiopharmaceuticals.  In theradiopharmaceutical category, DRAXIS has its own products and a targetedresearch and development (“R&D”) program for new and/or improved products.

The Company isincreasingly focusing on the use of GAAP measures both in reporting externallyand monitoring management performance. Specifically, the key metrics theCompany uses to evaluate divisional and consolidated performance are grossprofit margin, operating income, net income and operating cash flow. Non-GAAPfinancial measures, specifically EBITDA, will continue to be disclosed toprovide a comparative link between our historical disclosures as the Companytransitions to more traditional GAAP measures. The Company will continue toreconcile any non-GAAP financial measures used with GAAP line items. TheCompany additionally uses, as a performance measure, cash flows from operatingactivities less cash flows used in investing activities.

**Terminationof Amortization of *Anipryl®* DeferredRevenues**

As indicated in priordisclosures, substantially all deferred revenues related to the amortization ofpreviously received *Anipryl®*milestones terminated on December 31, 2006. The amortization of these deferredrevenues has previously resulted in non-cash revenues of $0.8 million perquarter, which has contributed approximately 7 cents of earnings per share (“EPS”)per full year. The termination of this

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source of non-cashrevenue and operating income has no effect on cash flows but will affect year-over-yearcomparisons of operating results going forward (see *Corporate and Other*and*Outlook*).

**2006Financial Results**

The Company successfullyachieved and surpassed its 2006 financial targets for both EPS and netoperating cash flows. Specifically with respect to EPS, the Company achieved 28cents per share for 2006 (or 21 cents excluding the amortization to income of *Anipryl®* deferred revenues), which is 9 cents per sharestronger compared to the same period of 2005 despite the following factors:

·                  During2005, the Company benefited from a contingent milestone payment from ShireBioChem Inc. (“Shire”), which contributed approximately 1.4 cents to EPS for2005.

·                  EffectiveJanuary 1, 2006, the Company has included stock-based compensation costs in selling,general and administration (“SG&A”) expenses as a non-cash item. This hadthe effect of lowering EPS by 2.3 cents for 2006 relative to 2005.

Operating income for 2006was $15.0 million, up 53% from $9.8 million in 2005.  Net cash flows from operating activities were$16.5 million for 2006 compared to $9.7 million for 2005.

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**CONSOLIDATEDRESULTS OF OPERATIONS AND RECONCILIATION OF NON-GAAP FINANCIAL MEASURES**

*(in thousands of U.S. dollars, except share related data)(U.S. GAAP)*

|                                     | ** **   | **2006**    | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------|--------------|-------------|------------|----------|------------|----------|------------|
|                                | ** **   | ** **  |       |     |       |     |       |
| Revenues                            |         |        |       |     |       |     |       |
| Product sales                       | ** **   | **$**       | **83,545** |     | $          | 72,989   |       | $ | 61,693 |   |
| Royalty and licensing               | ** **   | **2,121**   |       | 3,143    |       | 4,326    |       |
| *Anipryl**® deferred revenues* | ** **   | **3,301**   |       | 3,301    |       | 3,301    |       |
|                                | ** **   | **$**       | **88,967** |     | $          | 79,433   |       | $ | 69,320 |   |
|                                | ** **   | ** **  |       |     |       |     |       |
| Product gross  margin               | ** **   | **$**       | **36,462** |     | $          | 26,153   |       | $ | 21,900 |   |
| *% of Product sales revenues*       | *** *** | ***43.6***  | ***%***    | *35.8*   | *%*        | *35.5*   | *%*        |
| Royalty and  licensing revenue      | ** **   | **5,422**   |       | 6,444    |       | 7,627    |       |
| SG&A                            | ** **   | **(19,425** | **)**      | (16,185  | )          | (13,266  | )          |
| *% of Product sales revenues*       | *** *** | ***-23.3*** | ***%***    | *-22.2*  | *%*        | *-21.5*  | *%*        |
| R & D                           | ** **   | **(2,372**  | **)**      | (2,103   | )          | (1,948   | )          |
| EBITDA(1)                           | ** **   | **20,087**  |       | 14,309   |       | 14,313   |       |
| *% of Total revenues*               | *** *** | ***22.6***  | ***%***    | *18.0*   | *%*        | *20.6*   | *%*        |
| Depreciation and  amortization      | ** **   | **(5,135**  | **)**      | (4,545   | )          | (4,457   | )          |
| Operating income                    | ** **   | **14,952**  |       | 9,764    |       | 9,856    |       |
| *% of Total revenues*               | *** *** | ***16.8***  | ***%***    | *12.3*   | *%*        | *14.2*   | *%*        |
| Financial                           | ** **   | ** **  |       |     |       |     |       |
| - Foreign exchange  translation     | ** **   | **282**     |       | (398     | )          | (374     | )          |
| - Income (loss),  net               | ** **   | **347**     |       | (29      | )          | (296     | )          |
| Other income                        | ** **   | **—**  |       | —   |       | 96       |       |
| Income tax  provision               | ** **   | **(4,034**  | **)**      | (1,553   | )          | (1,301   | )          |
| Minority  interest                  | ** **   | **—**  |       | —   |       | (4       | )          |
| Loss from  discontinued operations  | ** **   | **—**  |       | —   |       | (61      | )          |
| Net income                          | ** **   | **$**       | **11,547** |     | $          | 7,784    |       | $ | 7,916 |   |
|                                |         |        |       |     |       |     |       |
| Net income (loss)                   | ** **   | ** **  |       |     |       |     |       |
| - From  continuing operations       | ** **   | **$**       | **11,547** |     | $          | 7,784    |       | $ | 7,977 |   |
| - From  discontinued operations     | ** **   | **—**  |       | —   |       | (61      | )          |
|                                | ** **   | **$**       | **11,547** |     | $          | 7,784    |       | $ | 7,916 |   |
|                                |         |        |       |     |       |     |       |
| Basic income  (loss) per share      | ** **   | ** **  |       |     |       |     |       |
| - From  continuing operations       | ** **   | **$**       | **0.28**   |     | $          | 0.19     |       | $ | 0.20 |   |
| - From  discontinued operations     | ** **   | **—**  |       | —   |       | —   |       |
|                                | ** **   | **$**       | **0.28**   |     | $          | 0.19     |       | $ | 0.20 |   |

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*(1)**      **Income from continuing operations before depreciation andamortization, financial income (expense), foreign exchange gain (loss), otherincome, income taxes and minority interest.**T**his earnings**measure does not have a standardized meaning prescribed byU.S. GAAP and therefore may not be comparable to similar measures used by othercompanies. Su**c**h measures should not be construed as the e**q**ui**v**alent of net cashflows from operating activities (see “Accounting Matte**rs — N**on-GAAPFinancial Measures”).*

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*Thefollowing provides a high level overview of the consolidated results of theCompany. Please refer to the segmented results for more detailed explanations.*

**Comparisonof Years Ended December 31, 2006 and 2005**

The financial results forthe year ended December 31, 2005 were negatively affected by the extendedshutdown period that occurred in the sterile products area of the Company’scontract manufacturing. Accordingly, all comparative variances on aconsolidated basis and in the contract manufacturing section reflect the impactof the extended shutdown in 2005.

Consolidated revenues forthe year ended December 31, 2006 are 12% higher compared to 2005.

Consolidated productsales have grown by $11 million, or 15%, for the year ended December 31, 2006compared to 2005, driven by lyophilization revenue (sterile products) incontract manufacturing and Sodium Iodide I-131 sales in the radiopharmaceuticalbusiness. (see the *Contract Manufacturing*segment discussion below).

Radiopharmaceuticalproduct sales grew 12% driven by radioiodine sales in the U.S. includingdiagnostic capsules which were introduced in the U.S. market place in thesecond quarter of 2006.

Consolidated productgross margin percentages for the year ended December 31, 2006 increased to 44%as compared with 36% for 2005. The increase reflects a better mix of highermargin business in both operating segments, especially sterile product volumein contract manufacturing.

Royalty and licensingrevenue decreased for the year ended December 31, 2006 compared with 2005. Thedecrease in royalty and licensing revenue for the year ended December 31, 2006compared to 2005 reflects the receipt of a $0.9 million contingent milestonepayment from Shire in 2005.

As a percentage ofproduct sales, SG&A expenses were 23% for the year ended December 31, 2006compared to 22% for 2005. The 20% increase in SG&A expenses in absolutedollar terms (excluding the impact of foreign currency translation) for theyear ended December 31, 2006 as compared with 2005 was driven by the inclusionof non-cash stock-based compensation costs beginning January 1, 2006 coupledwith increased incentive plan accruals based on the Company’s financialperformance for 2006 relative to 2005. The impact of the strengthening of the Canadian dollar for much of 2006relative to 2005 increased the nominal value of SG&A expenses for 2006relative to 2005.

R&D expendituresincreased slightly for the year ended December 31, 2006 compared to 2005 due tothe work related to specific phases of the Company’s development activitiesrelated to Sestamibi and the “next-generation” Technetium Generators as theCompany completed stages of activities with respect to both initiatives late in2006. These products are described in the *Radiopharmaceutical*ssection.

Depreciation andamortization expense for the year ended December 31, 2006 increased by 13% over2005 following the commencement of depreciation charges on the Company’scontract manufacturing capital upgrades.

The majority of the costsof the Canadian operations are denominated in Canadian dollars. As the level ofrevenues denominated in U.S. dollars and other foreign currencies increasesrelative to the underlying cost structure, the Company’s overall gross profitmargins and SG&A expenses are affected. The impact is not material on theoverall financial performance for the year.

The net foreign exchangegain for the year ended December 31, 2006 was $282,000 compared to a loss of$398,000 for 2005. As a result of the impact of the weakening of the Canadiandollar late in 2006, a foreign exchange gain was earned on U.S. dollardenominated monetary items in 2006, whereas the strengthening of the Canadiandollar late in 2005 created a foreign exchange loss.

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Net financial income for2006 was $347,000 compared to an expense of $29,000 in 2005 due to significantinterest income generated from surplus cash.

For the year endedDecember 31, 2006, the Company recorded an income tax expense, expressed as apercentage of pre-tax earnings of 26%. The Company’s effective tax rate will vary from the statutory tax ratedepending on the mix of income combined with the statutory rates in therespective jurisdictions in which the Company operates. The level of taxcredits generated from R&D activities in the radiopharmaceutical businessalso has the impact of lowering effective tax rates. Benefits related to losscarryforwards not previously recognized were not material in 2006 compared to2005.

The effective tax ratefor 2006 was higher than in 2005 due to a one-time adjustment to revalue theCompany’s income tax assets to a lower rate following the enactment of astatutory rate change to Canadian federal taxes in the second quarter of 2006.

The basic weightedaverage number of common shares outstanding during 2006 was 41,592,507 andincreased from 41,471,798 for 2005, primarily as a result of the exercise ofstock options offset by the shares purchased for cancellation under the Company’sNormal Course Issuer Bid.

**Comparisonof Years Ended December 31, 2005 and 2004**

Consolidated revenues of$79.4 million for the year ended December 31, 2005 represented an increase of15% compared with 2004.

Product sales increased18% or $11.3 million for the year ended December 31, 2005 compared to 2004. Theincrease related to continued growth in contract manufacturing revenues,specifically sterile operations, coupled with growth in the radiopharmaceuticalsegment and specifically Sodium Iodide I-131 sales to the U.S.  The growth in contract manufacturing wasrestrained during the second half of 2005 as a result of the extended shutdownperiod in contract manufacturing.

Product gross marginpercentages for the year ended December 31, 2005 were similar compared to 2004.While overall volumes increased, the business mix shifted from the highermargin radiopharmaceutical business to the relatively lower margin contractmanufacturing businesses. Furthermore, as a result of the extended shutdownperiod in contract manufacturing, unabsorbed fixed manufacturing costs and thecost of unused capacity related to reduced production had a negative impact onmargins for the second half of 2005.

Since increased revenuesrelated to growth in the sterile contract manufacturing operations and sterileproduct margins generally are lower than radiopharmaceutical margins, theoverall result is that the increased volumes do not result in an overallincrease to consolidated gross profit margins. Accordingly, the Company believesthat product gross margins are best reviewed at the segmental level.

Absolute product grossmargins increased for the year ended December 31, 2005 relative to 2004 as aresult of a stronger Canadian dollar and its positive impact on margins forproducts priced in Canadian dollars. However, the impact is largely offset bythe increase in SG&A costs strictly related to foreign currencytranslation. Since almost all SG&A expenses are incurred in Canadiandollars, the strengthening of the Canadian dollar beginning in early 2004 hasresulted in an increase in SG&A expenses in 2005 relative to 2004. Changesto foreign exchange rates did not, however, have a material impact on productgross margin percentages or net income.

For the year endedDecember 31, 2005 compared with 2004, royalty and license revenues decreased16%; however, the impact of the completion of the amortization of the deferredrevenue related to the SpectroPharm product line as of January 31, 2005 waspartially offset by the receipt of $0.9 million in contingent milestones fromShire, which the Company earned in the first quarter of 2005.

In absolute dollar terms,the increase in SG&A expenses was 22% for the year ended December 31, 2005(or 14% excluding foreign currency fluctuations) over 2004. Excluding theimpact of foreign currency reporting as described below, the increase inSG&A expenses was due to the one-time costs related to the

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Company’s exiting the *BrachySeed®* product line, severance costsrelated to the Company’s initial steps taken to reduce its overhead coststructure and process improvement initiatives focused in contractmanufacturing.

Approximately $1.1million of the increase in SG&A spending for the year ended December 31,2005 relative to 2004 was a consequence of increased costs in Canadian dollarsrelative to U.S. dollars as a result of the strengthening of the Canadiandollar beginning in early 2004.  Thisresulted from virtually all SG&A costs being denominated in Canadian dollars.

For the year endedDecember 31, 2005, R&D costs increased 8% relative to 2004 due toactivities related to *FIBRIMAGE®* and *INFECTON®*.  Theincreased expenditures were primarily attributable to clinical trial activitiesfor *INFECTON®,*coupled with costs associatedwith the detailed review of *FIBRIMAGE®*Canadian Phase III results and theassessment of optimal Phase III protocols for the U.S. by the expert medicaladvisory panel assembled by the Company.

Depreciation andamortization expenses for the year ended December 31, 2005 increased 1% over 2004following the completion of the installation and the validation of the Company’ssecond lyophilization unit. This expense was offset by the completion ofamortization of intangibles related to the SpectroPharm product line.

For the years ended 2004and 2005, the impact of foreign exchange on the Company’s results was similardue to the strengthening of the Canadian dollar over those two years.

Interest expense and bankcharges decreased for the year 2005 compared to 2004 due to repayment of thirdparty debt at the end of 2004.

The effective tax ratefor the year ended December 31, 2005 was 17%, or 24% excluding the benefits ofR&D tax credits.  The Companybenefited during 2005 from statutory tax rate changes that increased the valueof the Company’s loss carryforwards and from tax credits related to R&Dspending. During 2005 the Company further benefited by approximately $400,000through recognition of the lower effective statutory tax rate attributable tomilestone payments received and through withholding tax refunds received in thequarter but not previously estimated to be recoverable.

The Company’s effectivetax rate will vary from the statutory tax rate depending on the mix of netincome and the statutory rates in the respective jurisdictions in which theCompany operates. The level of tax credits generated from R&D activities inthe radiopharmaceutical business also had the impact of lowering effective taxrates by $642,000 for 2005.

The basicweighted-average number of common shares outstanding during 2005 was 41,471,798and increased from 39,886,219 in 2004 due mainly to the exercise of stockoptions.

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**RADIOPHARMACEUTICALS**

*(in thousands of U.S. dollars) (U.S. GAAP)*

|                                | ** **   | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------|--------------|------------|------------|------------|------------|------------|------------|
| * *                       | ** **   | ** ** |       |       |       |       |       |
| Revenues                       |         |       |       |       |       |       |       |
| Product sales                  | ** **   | **$**      | **21,508** |       | $          | 19,290     |       | $ | 17,172 |   |
| Royalty and licensing          | ** **   | **(3**     | **)**      | 9          |       | —     |       |
|                           | ** **   | **$**      | **21,505** |       | $          | 19,299     |       | $ | 17,172 |   |
|                           | ** **   | ** ** |       |       |       |       |       |
| Product gross  margin          | ** **   | **$**      | **13,433** |       | $          | 11,593     |       | $ | 10,028 |   |
| *% of Product sales revenues*  | *** *** | ***62.5*** | ***%***    | ***60.1*** | ***%***    | ***58.4*** | ***%***    |
| SG&A                       | ** **   | **(4,380** | **)**      | (4,660     | )          | (3,906     | )          |
| R & D                      | ** **   | **(2,372** | **)**      | (2,103     | )          | (1,948     | )          |
| EBITDA(1)                      | ** **   | **6,678**  |       | 4,839      |       | 4,174      |       |
| *% of Revenues*                | *** *** | ***31.1*** | ***%***    | *25.1*     | *%*        | *24.3*     | *%*        |
| Depreciation and  amortization | ** **   | **(1,110** | **)**      | (1,047     | )          | (949       | )          |
| Operating income               | ** **   | **5,568**  |       | 3,792      |       | 3,225      |       |
| *% of  Revenues*               | *** *** | ***25.9*** | ***%***    | *19.6*     | *%*        | *18.8*     | *%*        |

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*(1) **See “Accounting Matte**r**s — Non-GAAP Financial Measures**.**”*

Nuclearmedicine imaging and therapeutic agents are the focus of the Company’sradiopharmaceutical division, DRAXIMAGE, which develops, manufactures andmarkets diagnostic imaging and therapeutic radiopharmaceutical products for theglobal marketplace. Products currently marketed by DRAXIMAGE include a line oflyophilized Technetium-99m (“TC-99m”) kits used in nuclear medicine imagingprocedures and a line of imaging and therapeutic products labelled with avariety of isotopes including Sodium Iodide I-131. DRAXIMAGE has a number ofproducts in late-stage development including a generic Sestamibi injection (forwhich the Company filed an Abbreviated New Drug Approval (“ANDA”) with the U.S.Food and Drug Administration (“FDA”) in February 2007), a lyophilized productthat is widely used for Technetium-based cardiac imaging studies, a “next-generation”version of a Technetium Generator, and *INFECTON®,* forimaging infection.

**Comparisonof Years Ended December 31, 2006 and 2005**

Revenues for the yearended December 31, 2006 increased by 11% (or close to 20% excludingbrachytherapy products, which the Company stopped selling late in 2005)compared to 2005 primarily as a result of the increase in product sales fromradioiodine products and, specifically, Sodium Iodide I-131 sales to the U.S. ,including diagnostic capsules. The increase is related to higher volumesresulting from greater U.S. market penetration.

On January 13, 2006, theCompany received approval from the FDA regarding its supplemental new drugapplication for Sodium Iodide I-131 Capsules USP, Diagnostic-Oral.  These diagnostic Sodium Iodide I-131 capsulesare intended to be used by physicians to perform radioactive iodide uptaketests to evaluate thyroid function prior to treatment with stronger therapeuticdoses of Sodium Iodide I-131. The Company introduced the new diagnosticcapsules into the U.S. marketplace during the second quarter of 2006 toqualified/approved nuclear physicians and/or radiopharmacists.

For the year endedDecember 31, 2006 product gross margin increased to 63% for the year endedDecember 31, 2006 compared to 2005, reflecting the positive impact of SodiumIodide I-131 sales and the strategic focus on higher margin products that ledto the divestment of the brachytherapy product line in late 2005.

R&D expenditures forthe year ended December 31, 2006 as compared to 2005 increased 13% due to theramping up of product development activities, in particular activities relatedto Sestamibi and Technetium Generators (see below).

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SG&A expenses decreased by $0.3 million for the year ended December31, 2006 compared to 2005 due mainly to one-time costs relating to the Company’sexit from the brachytherapy business during the fourth quarter of 2005.

Operating income increased 47% to $5.6 million for 2006 as compared to2005 driven by increased volumes and margins as described above.

Depreciation andamortization expense for this segment was relatively unchanged in nominaldollars in 2006 compared to the year ended December 31, 2005.

***Radiopharmaceutical Product Development Strategy***

On March 27, 2006 theCompany announced that it had realigned its priorities for the R&D of newradiopharmaceutical products that it believes will drive future growth.Priorities for product development were established based on several factors,including time to market, customer needs, size of target markets, cost ofdevelopment and expected regulatory challenges for thevarious opportunities. The Company believes that this realignment will bethe significant driver for material growth in the radiopharmaceutical segment.DRAXIMAGE is now focused on developing products that it believes will replaceor improve upon several products that are currently in the nuclear medicinemarketplace, but that have or will have ceased to be protected by patents inkey markets in the near term.

Thefollowing summarizes the status of current significant initiatives:

*DRAXIMAGE**® Sestamibi*

As announced on February2, 2007, DRAXIMAGE submitted an ANDA to the FDA for its generic kit for thepreparation of Tc-99m Sestamibi for injection (“DRAXIMAGE® Sestamibi”), a nuclear medicine imaging agentused in myocardial perfusion imaging (“MPI”) to evaluate blood flow to theheart in patients undergoing cardiac tests.

According toAMR/Arlington Medical Resources, in 2005 there were more than 7 million cardiacstudies conducted in the U.S. out of a total of over 15 million nuclearmedicine procedures, making MPI the most widely performed nuclear medicinescan. Recent market research indicates that existing MPI products generaterevenues in excess of $500 million annually in the U.S. and that the imagingagent most often used in conducting MPI procedures is Sestamibi labelled withthe radioactive isotope Tc-99m.

The filing of the ANDAwith the FDA represented the achievement of a key milestone in the DRAXIMAGE® Sestamibi project schedule.

*Technetium Generators*

A second opportunity thatis currently being pursued by DRAXIMAGE is the production and distribution of a“next-generation” version of a Technetium Generator, which is the source ofTechnetium in virtually every radiopharmacy worldwide. Nearly 90% of generatorsare located in radiopharmacies and the rest are in other institutions, such ashospitals and clinics. DRAXIMAGE is in discussion with potentialdevelopment, marketing and distribution partners for this project. Prototypeversions of our “next-generation” Technetium Generator have been built and areundergoing evaluation. The feedback from our evaluation will help drive theproduct development process.

*EuropeanEntry*

DRAXIMAGE is continuingits efforts to obtain registrations in European markets for four of itsexisting products that are currently approved and sold in Canada or the U.S. InFebruary 2005, DRAXIMAGE received approval from the Dutch regulatoryauthority for its Kit for the Preparation of Technetium Tc-99m AlbuminAggregated Injection (“MAA Kit”). Initial approval in the Netherlands allowedDRAXIMAGE to initiate the Mutual Recognition Procedure (“MRP”) in pursuit offurther regulatory approvals for this product in several additional EuropeanUnion countries.

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Additional initialEuropean approvals for the majority of other diagnostic imaging products areanticipated to be received during 2007. DRAXIMAGE is in advanced discussionswith a potential European based commercial partner to initially target thelarger markets in Germany, France, Italy, Spain and the U.K. via a strategicalliance. The strategic alliance could also potentially serve as a means forDRAXIMAGE to expand its product catalogue in North America as well as inEurope. The Company expects to conclude such discussions during 2007.

*INFECTON*®

For the medium term, thekey opportunity being pursued by DRAXIMAGE is the continued development of *INFECTON*®, a novel diagnostic radiopharmaceutical product forimaging infection. Three Phase II clinical trials were completed and afourth was discontinued due to a change of market focus. Studies to define thetarget market population and appropriate clinical trial applications are nowbeing used to guide preparations for further development studies. An expert panel,comprised of respected nuclear medicine specialists and microbiologists, wasassembled and this expert panel reviewed the preliminary scientific andclinical data together with the outcome of the market research studies. Therole of the expert panel was to assess the results to date, review potentialtarget markets, and advise DRAXIMAGE on the design of future clinical studiesand appropriate indications. The preliminary report of the expert panelrecommended that the product be reformulated for orthopaedic-relatedindications and the assessment of such potential formulations is under way.

*Others*

DRAXIMAGE has alsoidentified additional new product opportunities in the area of non-radioactivecontrast media that are used in the medical imaging field and is pursuingpotential product development strategies to leverage both its position in themarketplace and its preferred access to appropriate productionprocess expertise. Contrast media products are injectable liquids producedin highly-specialized cGMP sterile production facilities, such as those inplace at DRAXIS’ facilities that are currently used to produce certaindiagnostic imaging products marketed by DRAXIMAGE. The North American marketfor contrast media has been estimated to be valued at approximately $1.6billion and it is believed to be growing, driven largely by the continuedgrowth of computer tomography (“CT”) and enhanced magnetic resonance imaging (“MRI”) procedures.

DRAXIMAGE has receivedapproval from the FDA to run two clinical trials using radioactive IobenguaneI-131 Injection (also known as “131I-metaiodobenzylguanidine”, or “I-131 MIBG”)to treat high risk neuroblastoma, a rare form of cancer that affects mostlyinfants and young children.

DRAXIMAGE will provideI-131 MIBG for two clinical trials approved by the FDA under a recentlysubmitted Investigational New Drug (“IND”) application. One trial is a Phase IIstudy in which I-131 MIBG will be administered with intensive chemotherapy andautologous stem cell rescue for high risk neuroblastoma patients. The secondtrial is a Phase I study in which irinotecan and vincristine, two commonchemotherapy agents, will be administered in combination with I-131 MIBG todetermine safety and tolerability in patients with resistant/relapsed high riskneuroblastoma.

**Comparison of Years Ended December 31, 2005 and 2004**

Revenues for the yearended December 31, 2005 increased 12% compared with 2004, primarily as a resultof higher product sales from radioiodine products and, specifically, SodiumIodide I-131 sales to the U.S. The increase was related to higher volumesresulting from greater U.S. market penetration.

As described above,during the first quarter of 2005, the Company received approval from the Dutchregulatory authority for its Kit for the Preparation of Technetium Tc-99mAlbumin Aggregated Injection (MAA Kit). Approval in the Netherlands allowedDRAXIMAGE to initiate the MRP in pursuit of further regulatory approvals forthis diagnostic imaging product in additional European Union countries. This

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approval was a keymilestone in the strategic plan to introduce several additional DRAXIMAGEbranded products into a number of European markets.

For the year endedDecember 31, 2005, product gross margin was stronger compared to 2004 due tothe increased market penetration of higher margined products like Sodium IodideI-131coupled with the positive impact of the Company’s decision to exit thebrachytherapy market.

R&D expendituresincreased slightly for the year ended December 31, 2005 as compared to 2004 dueto the activities related to *FIBRIMAGE®* and *INFECTON®*. Specifically, the increased expenditures weremainly for clinical trial activities for *INFECTON®*coupledwith costs associated with the ongoing detailed review of *FIBRIMAGE®*Canadian Phase III**results andactivities of the expert medical panel related to the strategy for the furtherproduct development and design and assessment of Phase III clinical trialprotocols for the U.S.

The report andrecommendations of this expert panel were used to assess the strategy forfurther development of *FIBRIMAGE*® and design and assessment of Phase IIIclinical trial protocols for the U.S. No significant work related to *FIBRIMAGE*® tookplace following the recommendations of the expert panel in 2006.

SG&Aexpenses increased for the year ended December 31, 2005 compared to 2004 mainlydue to one-time costs relating to the Company’s exit from the brachytherapymarket and costs of market research studies and activities.

The Company incurredapproximately $457,000 of one-time costs associated with the exit of thebrachytherapy business during 2005. Over 60% of the costs incurred related toaccrual of license termination costs related to the business and is included inSG&A expense. The remainder of the exit costs related to unused inventorycomponents is included in cost of goods sold. The majority of capital equipmentused in the *BrachySeed®* productline, specifically the robotic equipment, is being redeployed in both theradiopharmaceutical and contract manufacturing segments.

Depreciation andamortization expense for this segment increased 10% for the year ended December31, 2005 compared to 2004 due to the amortization of costs related to theupgrade of warehousing and shipping facilities completed late in 2004.

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**CONTRACTMANUFACTURING**

*(in thousands of U.S. dollars) (U.S. GAAP)*
| ** **                    | ** **   | **2006**    | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|--------------|-------------|------------|----------|------------|----------|------------|
| * *                      | ** **   | ** **  |       |     |       |     |       |
| Revenues                      |         |        |       |     |       |     |       |
| Product sales                 | ** **   | **$64,731** |       | $54,743  |       | $46,461  |       |
|                          | ** **   | ** **  |       |     |       |     |       |
| Product gross margin          | ** **   | **$23,215** |       | $14,628  |       | $11,530  |       |
| *% of Product sales revenues* | *** *** | ***35.9***  | ***%***    | *26.7*   | *%*        | *24.8*   | *%*        |
| SG&A                      | ** **   | **(6,487**  | **)**      | (5,086   | )          | (3,492   | )          |
| EBITDA(1)                     | ** **   | **16,728**  |       | 9,542    |       | 8,038    |       |
| *% of Revenues*               | *** *** | ***25.8***  | ***%***    | *17.4*   | *%*        | *17.3*   | *%*        |
| Depreciation and amortization | ** **   | **(3,688**  | **)**      | (3,105   | )          | (2,417   | )          |
| Operating income              | ** **   | **13,040**  |       | 6,437    |       | 5,621    |       |
| *% of  Revenues*              | *** *** | ***20.1***  | ***%***    | *11.8*   | *%*        | *12.1*   | *%*        |

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(1)   *See “Accounting Matte**r**s — Non-GAAP Financial Measures**.**”*

Manufacturing comprisesthe Company’s manufacturing division, DRAXIS Pharma, which is a pharmaceuticalcontract manufacturer with capabilities in a broad range of dosage forms,specializing in liquid and lyophilized (freeze-dried) injectables and othersterile products. Operating out of a cGMP-compliant 247,000 square footfacility located in Montreal, Canada, DRAXIS Pharma manufactures certainpharmaceutical products (specifically, cold kits) for DRAXIMAGE, as well as forover 25 other pharmaceutical clients in many international jurisdictions.

**Comparison of Years Ended December 31, 2006 and 2005**

As stated in prior disclosures, beginning in March2006, production run rates in the sterile area were back at levels expected forthe contract manufacturing operations prior to the shutdown issues of late 2005and actually exceeded previous normalized levels in part due to thecontribution of the second lyophilization unit, which came on line in 2005. Theimpact of the extended shutdown in 2005 also negatively affected results forthe fourth quarter of 2005. Since the shutdown for 2006 was completed in thethird quarter of 2006 as planned, fourth quarter results for 2006 as comparedto 2005 are significantly stronger.

For the year endedDecember 31, 2006, revenues increased by $10 million or 18% over 2005. Theincrease was due to increased commercial production of *Hectorol®*Injection for Genzyme Corporation (“Genzyme”),growth in GlaxoSmithKline (“GSK”) volumes and increases in lyophilized productproduction.

For the year endedDecember 31, 2006, sterile volumes accounted for 80% of product revenuescompared to 76% for 2005.

Product gross marginpercentage for the year ended December 31, 2006 increased to 36% compared to27% for 2005, driven by a higher ratio of sterile to non-sterile productrevenues and the dilutive impact of the extended shutdown on 2005 product grossmargins. The extended shutdown period in 2005 negatively affected product grossmargin percentage by at least 5% during the second half of 2005.

For the year endedDecember 31, 2006, SG&A expenses rose by $1.4 million compared to 2005 as aresult of incentive plan accruals, the provision for past due receivables andprocess improvement initiatives, including information system and technologyinitiatives. Historically, the Company has not incurred significant provisionsfor past due receivables. SG&A expenses are also inflated for the yearended December 31, 2006 by the strengthening of the Canadian dollar relative tothe U.S. dollar for most of 2006 (relative to 2005), since the vast majority ofSG&A expenses are denominated in Canadian dollars.

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Depreciation andamortization for the year ended December 31, 2006 increased 19% over 2005, dueprincipally to completed capital projects in 2005, which provided for increasedlyophilization and autoclave capacity.

Operating income for allof 2006 increased to $13 million (20% of revenues) compared to $6 million (12%of revenues) for 2005. The increase was driven by higher product sales andproduct gross margins, partially offset by higher SG&A expenses.

While the Company’ssuccess has been driven by its strategy to focus on higher margin sterileproducts, the Company also believes there is opportunity to benefit from theunused capacity in its non-sterile area. The Company is currently in theadvanced stages of negotiations to secure significant new non-sterile businessbut has not yet concluded contractual arrangements for such business. It isdifficult to predict when contractual arrangements will be finalized if thenegotiations are successful as such arrangements can take months to negotiateand close. Disclosure of the nature of any contractual arrangements will bemade upon signing of a definitive agreement.

**Comparison of Years Ended December 31, 2005 and 2004**

The Company hadoriginally planned to shut down its sterile operations in contractmanufacturing for a period of two to three weeks for regular maintenance in thethird quarter of 2005, as is its normal practice. Near the end of this plannedshutdown, it became necessary to upgrade additional pieces of equipment in thesterile area, including in its lyophilized products area. This required furthercleaning and validation of the facility’s sterile core, thus extending theplanned shutdown period to approximately seven weeks. The Company took thesesignificant measures as a result of its internal quality standards. However, asa result of having to recalibrate sterile production schedules based on discussionswith clients, which continued into mid to late November 2005, the qualitycontrol process required for sterile products prior to shipment, and a delay inreceiving component parts from a third party manufacturer in the fourth quarterof 2005, product sales in the second half of 2005 were negatively impactedrelative to 2004. However, production levels in the sterile area returned topre-shutdown levels by November 2005.

Revenues for the yearended December 31, 2005 increased $8.3 million or 18% over 2004, even factoringin the negative impact of the extended shutdown. The increase was due toincreased demand for the production of *Hectorol®Injection* for Genzyme and products under the Company’s GSK contract.GSK production rose throughout 2004 as GSK obtained regulatory approvals forproducts manufactured by the Company in additional foreign markets. Throughout2004 and into 2005, the Company increased its output capacity throughadditional production shifts for its sterile business and intends to continueto do so as a result of increasing demand.

Sterile products haveaccounted for all of the product sales growth on a year-to-date basis. Sterileproducts represented 76% of manufacturing revenues on a year-to-date basis in2005 compared to 67% for 2004.

The second lyophilizationunit, which was fully installed and validated by early 2005, did not contributea significant amount of incremental revenues in 2005 since much of the activityon the second lyophilizer was in support of meeting customer demand displacedfrom the third quarter of 2005 as a result of the extended shutdown period. Theextended shutdown did, however, significantly slow the pace at which theCompany was able to carry the normal commercial activities on its secondlyophilization unit. This resulted from the focus being placed on ensuring thatexisting customer demand and requirements were met. Capacity was, accordingly,largely reserved for that purpose in the latter part of 2005.

Product transfer andvalidation activities are necessary as a precursor to significant commercialvolumes and do not create significant revenues, although they consumesignificant available capacity. Revenues from the second lyophilization unitincreased beginning in 2006 and are expected to increase more significantlyinto 2007 since the Company refocused activities back to new productintroductions and new contract negotiations in 2006.

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Product gross marginpercentage for the year ended December 31, 2005 increased to 27% from 25%compared to 2004. The increases were related to volume growth, principally ofhigher margin sterile products, that had taken place prior to the extendedshutdown period. The volume growth was made possible by increasing the capacityfor manufacturing sterile products through the introduction of additionalproduction labour. Improved capacity utilization directly resulted in highermargins through substantially improved absorption of overhead costs. Theextended shutdown in 2005 had the impact of lowering product gross margin percentagefor the full year by between 2% to 4% and at least 5% over the final six monthsof 2005.

Excluding the impact offoreign currency translation, the increase in SG&A expenses for the yearended 2005 compared to 2004 related to the investment in process improvementinitiatives and severance costs of $250,000 related to steps taken to reducethe overhead cost structure in contract manufacturing. The Company has embarkedon process improvement initiatives aimed at enhancing information systems andinformation technology to improve efficiency and productivity in the keyprocesses of production planning, manufacturing and quality control productrelease. We believe the process improvement initiatives will, over time,increase throughput of volumes within the existing manufacturing footprint andthereby increase capacity. Furthermore, the Company expects to increaseoperating margins over time through the application of more efficientprocesses.

Since virtually allSG&A costs are denominated in Canadian dollars and translated into U.S.dollars, the strengthening of the Canadian dollar beginning in early 2004resulted in inflated SG&A costs upon translation into U.S. dollars of about$346,000 for the year ended December 31, 2005. These costs were offset by overallgrowth of absolute margins upon translating Canadian denominated sales intoU.S. dollars.

Depreciation andamortization increased 29% for the year ended December 31, 2005 over 2004, dueprincipally to completed capital projects including additional autoclavecapacity, and following the completion of the installation and validation ofthe Company’s second lyophilization unit in the second quarter of 2005.

The Company announced onSeptember 1, 2005 that it renewed its production outsourcing arrangement with PfizerCanada Inc., Pfizer Consumer Healthcare division. The new three-yearmanufacturing agreement became effective as of January 1, 2005 and will allowthe Company to continue to produce several non-prescription products as one ofa select number of approved suppliers to Pfizer Consumer Healthcare Canada. OnDecember 20, 2006 the Company was advised that Johnson & Johnson, Inc. hadpurchased Pfizer’s Consumer Healthcare business and that the agreement wasassigned to Johnson & Johnson, Inc.

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**CORPORATEAND OTHER**

*(in thousands of U.S. dollars) (U.S. GAAP)*
| ** **                               | ** **   | **2006**     | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------|--------------|--------------|------------|----------|------------|----------|------------|
| Revenues                                 |         |         |       |     |       |     |       |
| Product sales                            | ** **   | **$**        | **295**    |     | $          | 499      |       | $ | 274 |   |
| Intercompany eliminations                | ** **   | **(2,989**   | **)**      | (1,543   | )          | (2,214   | )          |
| Royalty and licensing                    | ** **   | **2,124**    |       | 3,134    |       | 4,326    |       |
| *Anipryl**® deferred revenues* | ** **   | **3,301**    |       | 3,301    |       | 3,301    |       |
|                                     | ** **   | **$**        | **2,731**  |     | $          | 5,391    |       | $ | 5,687 |   |
|                                     | ** **   | ** **   |       |     |       |     |       |
| Product gross margin                     | ** **   | **$**        | **(186**   | **)**    | $          | (68      | )          | $ | 342 |   |
| SG&A                                 | ** **   | **(8,558**   | **)**      | (6,439   | )          | (5,868   | )          |
| EBITDA(1)                                | ** **   | **(3,319**   | **)**      | (72      | )          | 2,101    |       |
| *% of Revenues*                          | *** *** | ***-121.5*** | ***%***    | *-1.3*   | *%*        | *36.9*   | *%*        |
| Depreciation and amortization            | ** **   | **(337**     | **)**      | (393     | )          | (1,091   | )          |
| Operating (loss) income                  | ** **   | **(3,656**   | **)**      | (465     | )          | 1,010    |       |
| *% of  Revenues*                         | *** *** | ***-133.9*** | ***%***    | *-8.6*   | *%*        | *17.8*   | *%*        |

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(1)*   See “Accounting Matte**r**s — Non-GAAP Financial Measures**.**”*

The Corporate and Othersegment comprises: amortization of deferred revenues, royalties**and expenses associated with the Company’s businessagreements with Pfizer Inc. with respect to *Anipryl®*;revenues related to royalties and milestones from Shire in connection with thedivestiture of DRAXIS Pharmaceutica; non-allocated corporate expenses and intercompanyeliminations. The Company follows a policy of not allocating its centralcorporate expenses to its operating business segments.

**Comparisonof Years Ended December 31, 2006 and 2005**

Corporate revenues forthe year ended December 31, 2006 were $2.7 million lower compared to 2005 dueto the receipt of a contingent milestone payment of $0.9 million from Shireincluded in 2005 results and higher intercompany eliminations. Intercompanyeliminations increased for the year ended December 31, 2006 compared to 2005due to higher volumes of cold kits manufactured by the contract manufacturingsegment for the radiopharmaceutical segment.

As indicated in priordisclosures, substantially all deferred revenues related to the amortization ofpreviously received *Anipryl®*milestones terminated on December 31, 2006. The amortization of these deferredrevenues has previously resulted in non-cash revenues of $0.8 million perquarter or $3.3 million per year (see *Outlook*).

Depreciation andamortization expense in this segment in 2006 was relatively flat as compared to2005 since the Company had fully amortized product rights related to theSpectroPharm line in January 2005.

Operating loss for theyear ended December 31, 2006 was $3.2 million higher than for 2005 due to thereceipt of a contingent milestone payment of $0.9 million from Shire includedin 2005 results, the inclusion of stock-based compensation costs in SG&Aexpenses effective January 1, 2006 and increased incentive accruals for 2006.

**Comparisonof Years Ended December 31, 2005 and 2004**

Revenues related to thecorporate segment were lower in 2005 compared to the fourth quarter 2004 due toa reduction of deferred revenue amortization offset by lower inter-segmenteliminations. In addition, as of January 31, 2005, all deferred revenue relatedto the SpectroPharm line of products was fully amortized. The amortization ofdeferred revenue related to the SpectroPharm line had accounted forapproximately $500,000 of non-cash revenues per full quarter.

Also during 2005,revenues for this segment included the receipt of contingent milestones of $0.9million from Shire, which the Company earned in early 2005, partially offset bya reduction of deferred revenue

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amortization. Thecontingent milestones were earned based on market driven conditions relateddirectly to product sales.

Depreciation andamortization expense in this segment in 2005 decreased as compared to 2004since the Company had fully amortized product rights related to theSpectroPharm line in January 2005.

SG&A expensesincreased $571,000 for the year ended 2005 compared with 2004 due toincremental spending on corporate business development activities, regulatorycompliance costs related to the *Sarbanes-OxleyAct of 2002*and the impact of foreign exchange in the translation ofCanadian denominated costs to U.S. reporting dollars. Aside from the impact offoreign currency, none of the factors noted increased SG&A expenses by morethan $200,000 individually. As a result of the strengthening of the Canadiandollar versus the U.S. dollar since early 2004, approximately $438,000 of theSG&A expenses for 2005 were related solely to foreign currency translation.

Operating income fromthis segment decreased compared to 2004 due to the factors described above.

**LIQUIDITYAND CAPITAL RESOURCES**

*(in thousands of U.S. dollars) (U.S. GAAP)*
| ** **                               | ** ** | **2006**    | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
|                                     | * *   | * *    | * *   | * * | * *   | * * | * *   |
| Cash and cash equivalents                |       | **$21,446** | ** ** | $12,390  |       | $5,926   |       |
| Restricted cash                          |       | **—**  | ** ** | —   |       | $428     |       |
| Non-financial working capital (net)(1)   |       | **$21,247** | ** ** | $18,890  |       | $18,397  |       |
| Total debt (current and long-term)       |       | **—**  | ** ** | —   |       | —   |       |
|                                     |       |        |       |     |       |     |       |
| Cash flows from operating activities     |       | **$16,450** | ** ** | $9,717   |       | $5,129   |       |
| Cash flows used  in investing activities | ** ** | **($5,993** | **)**      | ($4,380  | )          | ($4,290  | )          |

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(1)   Excludingcash and cash equivalents, restricted cash, current portion of deferredrevenues and customer deposits.
| ** **                                      | ** ** | **Feb 23, 2007** | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|------------|------------|------------|------------|------------|------------|
|                                            | ** ** | ** **                 |       |       |       |       |       |       |       |
| Common shares issued and outstanding            | ** ** | **41,837,140**             |       | 41,522,138 |       | 41,588,005 |       | 41,015,326 |       |
| Warrants issued and outstanding(2)              | ** ** | **—**                 |       | —     |       | 1,526,718  |       | 1,526,718  |       |
|                                            | ** ** | **2,362**                  |       |       |       |       |       |       |       |
| Stock options outstanding                       | ** ** | **993**                    |       | 2,257,995  |       | 2,652,620  |       | 2,753,232  |       |
| Outstanding options as a% of outstanding shares | ** ** | **5.6**                    | **%**      | 5.4        | %          | 6.4        | %          | 6.7        | %          |

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(2)   Eachwhole warrant entitled the holder to acquire one common share at a price ofCDN$8.50, subject to certain adjustments, any time prior to April 24, 2006. Allwarrants expired unexercised on April 24, 2006.

Cash and cash equivalents as of December 31, 2006totalled $21.4 million as compared with $12.4 million as of December 31, 2005and $5.9 million as at December 31, 2004. The increase is attributable to theincreasing cash earnings of the Company and proceeds from the exercise of stockoptions offset by capital expenditures and funds used to buy back the Company’sshares under the 2006 Issuer Bid. In management’s opinion, the Company hassufficient funds to meet its present working capital requirements.

The Company follows apolicy of investing its surplus cash resources in high quality, liquid,short-term commercial paper and government treasury bills and money marketmutual funds that invest in high quality short-term securities. All investmentsas of December 31, 2006, 2005 and 2004 had less than three months maturity. Asat December 31, 2006 there were no restrictions on the flow of these funds norhave any of these funds been committed in any way.

For the year endedDecember 31, 2006, net operating cash flows were $16.4 million compared to $9.7million for 2005 and $5.1 million for 2004. The year-over-year increases in netoperating cash flows have been driven by increased volumes in the Company’s twocore businesses partially offset by a higher investment in working capital.

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Non-financial workingcapital, comprising accounts receivable, inventories, prepaid expenses, currentdeferred income tax assets, accounts payable and accrued liabilities, as atDecember 31, 2006 increased compared to December 31, 2005 and December 31, 2004due mainly to increased receivable levels related to volume growth and timingof collection of receivables.

Capital expenditures forthe year ended December 31, 2006 are mainly attributable to expenditures toimprove operating efficiencies in production areas, increase manufacturingcapacity and infrastructure upgrades, namely to the Company’s informationtechnology and SAP platforms. Infrastructure upgrade expenditures from existingprograms are expected to continue into the first half of 2007. Capitalexpenditures for 2004 and 2005 were mainly to due to the installation andvalidation of the Company’s second lyophilization unit.

All third party debt wasrepaid at the end of 2004 (see*Bank Financing).*

Proceeds from theissuance of treasury common shares by the Company attributable to the exerciseof options generated $1.9 million for the year ended December 31, 2006 comparedwith $1.6 million for 2005 and 2004.

The following tablesummarizes the Company’s major contractual cash obligations as of December 31,2006:
| ** **                       | ** ** | **Payment due by end of:** | ** ** |
|----------------------------------|------------|------------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                                      | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** |
| Operating leases                 |       | 45                                             |       | 16 |   | 16 |   | 11 |   | 2 |   | — |   | — |   |
| Service contracts                |       | 370                                            |       | 271 |   | 82 |   | 17 |   | — |   | — |   | — |   |
| Milestone obligations            |       | 1,100                                          |       | 150 |   | 150 |   | 150 |   | 150 |   | 250 |   | 250 |   |
| Total contractual  obligations   |       | 1,515                                          |       | 437 |   | 248 |   | 178 |   | 152 |   | 250 |   | 250 |   |

 

All contractualobligations related to 2006 and 2005 were fully paid as of December 31, 2006and December 31, 2005 respectively.

In addition to the above,the Company may be obligated to make certain royalty payments based on relatedproduct sales and milestone payments based on the achievement of certainspecified events.

The amount, timing andlikelihood of these royalty payments are not determinable as they mainly relateto products being developed and not yet approved by the applicable regulatoryauthorities.

**BankFinancing**

The Company has thefollowing credit facilities available, expiring June 2007:

—                CDN$15 million orU.S.$equivalent operating facility payable within 364 days upon drawing uponthe facility. The operating facility can be extended by one year upon agreementwith the lender. As at December 31, 2006, no amount was drawn under thisfacility.

—                CDN$10 million orU.S.$equivalent term facility, repayable in full at the end of the term. As atDecember 31, 2006, 2005 and 2004 no amount was drawn under this facility.

As of December 31, 2006,a letter of credit was issued to the Company’s payroll provider in the amountof $621,000 which expires on March 25, 2007.

Interest under the creditfacilities (both term and operating) is based on the bank’s prime lending rateprovided that the Company meets certain ratios, which as at December 31, 2006were met.

Amounts drawn under bothcredit facilities would be secured by specific assets of DRAXIS SpecialtyPharmaceuticals Inc., and shares and guarantees of certain other subsidiaries.

The Company was in compliancewith all lending covenants as at December 31, 2006, 2005 and 2004.

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**Off-BalanceSheet Arrangements**

The Company does not haveany off-balance sheet arrangements that have, or are reasonably likely to have,a current or future effect on the Company’s financial condition, changes inrevenues or expenses, results of operations, liquidity, capital expenditures orcapital resources that are material to investors.

**Research andDevelopments, Patents and Licenses**

In accordance with SFASNo.2 *Accounting for Research and DevelopmentCosts*, research and development costs are expensed in the period inwhich they are incurred. Acquired research and development having noalternative future use is written off at the time of acquisition. The cost ofintangibles that are purchased from others for a particular research anddevelopment project that have no alternative future use is written off at thetime of acquisition.

In the last three fiscalyears ended December 31, 2004, December 31, 2005 and December 31, 2006, theCompany has spent $1,948,000, 2,103,000 and 2,372,000 respectively on Researchand Development expenses.

**SELECTEDANNUAL INFORMATION**

*(in thousands of U.S. dollars, except share related data)(U.S. GAAP)*
| ** **                                  | ** ** | **2006**   | ** **  | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------|------------|------------|-------------|----------|------------|----------|------------|
|                                        | ** ** | ** ** |        |     |       |     |       |
| Revenues                                    |       |       |        |     |       |     |       |
| Product sales                               | ** ** | **$**      | **83,545**  |     | $          | 72,989   |       | $ | 61,693 |   |
| Royalty and licensing                       | ** ** | **2,121**  |        | 3,143    |       | 4,326    |       |
| *Anipryl**® deferred revenues*    | ** ** | **3,301**  |        | 3,301    |       | 3,301    |       |
|                                        | ** ** | **$**      | **88,967**  |     | $          | 79,433   |       | $ | 69,320 |   |
|                                        | ** ** | ** ** |        |     |       |     |       |
| Net income (loss)                           | ** ** | ** ** |        |     |       |     |       |
|  - From  continuing operations         | ** ** | **$**      | **11,547**  |     | $          | 7,784    |       | $ | 7,977 |   |
| - From discontinued operations              | ** ** | **—** |        | —   |       | (61      | )          |
|                                        | ** ** | **$**      | **11,547**  |     | $          | 7,784    |       | $ | 7,916 |   |
|                                        |       |       |        |     |       |     |       |
| Basic income (loss) per share               | ** ** | ** ** |        |     |       |     |       |
|  - From  continuing operations         | ** ** | **$**      | **0.28**    |     | $          | 0.19     |       | $ | 0.20 |   |
| - From discontinued operations              | ** ** | **—** |        | —   |       | —   |       |
|                                        | ** ** | **$**      | **0.28**    |     | $          | 0.19     |       | $ | 0.20 |   |
|                                        |       |       |        |     |       |     |       |
| Diluted income (loss) per share             | ** ** | ** ** |        |     |       |     |       |
|  - From  continuing operations         | ** ** | **$**      | **0.28**    |     | $          | 0.18     |       | $ | 0.19 |   |
| - From discontinued operations              | ** ** | **—** |        | —   |       | —   |       |
|                                        | ** ** | **$**      | **0.28**    |     | $          | 0.18     |       | $ | 0.19 |   |
|                                        |       |       |        |     |       |     |       |
|  Total assets                          | ** ** | **$**      | **105,962** |     | $          | 95,820   |       | $ | 88,785 |   |
|  Total long-term financial liabilities | ** ** | **990**    |        | 308      |       | —   |       |

 

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**SUMMARYOF QUARTERLY RESULTS**

*(inthousands of U.S. dollars, except share related data) (U.S. GAAP)*
| ** **                        | ** ** | **Q4, 2006** | ** ** | **Q3, 2006** | ** ** | **Q2, 2006** | ** ** | **Q1, 2006** | ** ** | **Q4, 2005** | ** ** | **Q3, 2005** | ** ** | **Q2, 2005** | ** ** | **Q1, 2005** | ** ** |
|-----------------------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|-------------------|------------|
|                              | ** ** | ** **        |       |              |       |              |       |              |       |              |       |              |       |              |       |              |       |
| Revenues                          |       |              |       |              |       |              |       |              |       |              |       |              |       |              |       |              |       |
| Product sales                     | ** ** | **$**             | **23,106** |              | $          | 19,788            |       | $                 | 23,003     |              | $          | 17,648            |       | $                 | 17,273     |              | $          | 16,034 |   | $ | 19,176 |   | $ | 20,506 |   |
| Royalty and licensing             | ** ** | **465**           |       | 617               |       | 437               |       | 603               |       | 562               |       | 598               |       | 470               |       | 1,514             |       |
| *Anipryl® deferred revenues* | ** ** | **825**           |       | 825               |       | 825               |       | 825               |       | 825               |       | 825               |       | 825               |       | 825               |       |
|                              | ** ** | **$**             | **24,396** |              | $          | 21,230            |       | $                 | 24,265     |              | $          | 19,076            |       | $                 | 18,660     |              | $          | 17,457 |   | $ | 20,471 |   | $ | 22,845 |   |
|                              | ** ** | ** **        |       |              |       |              |       |              |       |              |       |              |       |              |       |              |       |
| Net income                        | ** ** | **$**             | **3,687**  |              | $          | 2,604             |       | $                 | 3,564      |              | $          | 1,692             |       | $                 | 1,067      |              | $          | 1,069 |   | $ | 2,353 |   | $ | 3,295 |   |
|                              |       |              |       |              |       |              |       |              |       |              |       |              |       |              |       |              |       |
| Basic income per  share           | ** ** | **$**             | **0.09**   |              | $          | 0.06              |       | $                 | 0.09       |              | $          | 0.04              |       | $                 | 0.03       |              | $          | 0.03 |   | $ | 0.06 |   | $ | 0.08 |   |
|                              |       |              |       |              |       |              |       |              |       |              |       |              |       |              |       |              |       |
| Diluted income per  share         | ** ** | **$**             | **0.09**   |              | $          | 0.06              |       | $                 | 0.09       |              | $          | 0.04              |       | $                 | 0.03       |              | $          | 0.03 |   | $ | 0.06 |   | $ | 0.08 |   |

 

**MAJORTRENDS IN QUARTERLY NUMBERS**

*Thequarterly numbers reflected in the above table reflect the significant trendsdescribed below. For more detailed explanations, please refer to management’sdiscussion and analysis of financial condition and results of operations (“MD&A”),filed on a quarterly basis on SEDAR and with the Securities and ExchangeCommission on Form 6-K. The MD&A for the quarter ended December 31, 2006 isincorporated herein by reference.*

Commencing in the secondquarter of 2003, the contract manufacturing segment began a significant ramp-upof shipments of *Hectorol® Injection*for Genzyme and products under its GSK manufacturing agreements. This resultedin a positive upward trend in revenue mainly in contract manufacturing andincreasing margins due to the higher margin sterile business and the financialbenefits of improved capacity utilization. The major trend in revenues has beenthe shift in business in contract manufacturing where sterile product revenueoccupies a higher share of overall revenue driven by the GSK and Genzymebusiness. This trend continued through 2004 and into the third quarter of 2005.The result was increasing volume and associated product gross margins incontract manufacturing.

During the third quarterof 2004, there were production breaks caused by normal shutdown activities toperform maintenance and complete capital expenditure projects. The effect incontract manufacturing was to reduce volumes and margins due to productiondowntime resulting in higher unabsorbed overhead costs.

However, during the thirdquarter of 2005, the Company’s contract manufacturing operation extended itsscheduled shutdown period at the beginning of the third quarter in the sterilearea in order to correct an electrical panel failure and make associatedrepairs. The decision to revalidate the entire sterile area following theserepairs and to recalibrate production schedules had material financialimplications that hindered third and fourth quarter results in 2005. Finalizingand executing on production schedules in the fourth quarter of 2005 werefurther hindered by delays in receiving some component materials fromsuppliers. Production in contract manufacturing was ramping up towardsnormalized production levels by the end of the third quarter of 2005. Theoverall effect of the extended shutdown was to negatively affect the Company’skey financial metrics over the second half of 2005 and offset the significantgrowth achieved over 2004 in the first half of 2005. The impact on productgross margins in the second half of 2005 was approximately 5%. The peripheralimpacts of the extended shutdown specifically as it related to productionscheduling impacted overall results into February 2006.

 

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Beginning March 2006, theCompany returned to normalized production volumes. The contract manufacturingsegment began achieving significant volume growth beginning with the secondquarter of 2006 and extending to the end of 2006. The growth was driven by thesterile products area, in particular, by volume from two major customers,Genzyme and GSK. In addition, the Company benefited from the effects of thecontribution of additional lyophilization capacity for 2006, which increasedsterile lyophilization volumes in 2006 relative to 2005. Third quarter resultsfor 2006 reflected the impact of a normal shutdown period in contractmanufacturing. As the 2006 shutdown was completed on plan, the Company was ableto return to volumes achieved in the second quarter of 2006 by the fourthquarter.

In theradiopharmaceutical segment, volumes have increased since the first quarter of2003, related to the introduction of Sodium Iodide I-131 to the U.S. In thefourth quarter of 2004, a change in customer purchasing patterns occurred,which lowered cold kit sales to the U.S. below traditional levels in Octoberand November. Cold kit sales returned to more traditional levels in 2005 andthe primary driver for growth in 2005 remained the increasing penetration ofSodium Iodide I-131 in the U.S. Radioiodine sales (Sodium Iodide I-131)continued to drive sales growth in 2006 via increased U.S. market penetrationincluding the introduction of diagnostic capsules into the U.S. marketplace.Overall, margins increased over 2005 due to the decision in late 2005 todiscontinue sales of brachytherapy products.

Apart from the impact offoreign currency on the Company’s Canadian denominated SG&A spending,SG&A spending increased in 2005 due to costs of process improvementinitiatives commencing in the second quarter of 2005, one-time costs associatedwith the exit of the brachytherapy product line, which occurred in the fourthquarter of 2005 and severance costs in the fourth quarter of 2005.  Effective January 1, 2006, the Company hasincluded stock-based compensation costs in SG&A expenses as a non-cashitem. This had the effect of lowering EPS by 2.3 cents for 2006 relative to2005 or 0.6 cents per quarter during 2006. Fourth quarter 2006 results wereimpacted by accruals for long term incentive plan awards based on the Company’sfinancial performance in 2005.

Depreciation andamortization costs continue to rise over time. This reflects the capitalexpenditure programs implemented since 2002. This trend continued,specifically, as the second lyophilization unit was fully installed andvalidated in the first half of 2005.

Foreign exchange hasimpacted EPS to the extent of the strengthening of the Canadian dollar and itsaffect on the Company’s net monetary position held in U.S. dollars for 2005resulting in a foreign exchange loss during 2005. The Canadian dollar weakenedlate in 2006 resulting in a foreign exchange gain on U.S. dollar denominatednet monetary items.

Interest income hasincreased and become more significant as the Company eliminated debt levels atthe end of 2004 and built up its interest bearing cash position since then.

The Company’s effectivetax rate has been significantly below the statutory rate due to the recognitionof previously unrecognized loss carryforwards. The Company’s ability to executeon tax planning opportunities has expanded as a result of the increasedoperating profits of its contract manufacturing segment, the amalgamation ofits two core businesses effective January 1, 2005, and the purchase of allminority interest shareholdings of its contract manufacturing business on April22, 2004. This trend is not expected to continue in the long term and theeffective tax rate is expected to return closer to statutory levels, subject tothe amount of R&D spending.  Over theshort term and specifically in 2005, the Company benefited from the recognitionof the lower effective statutory tax rate attributable to milestone paymentsreceived, and through withholding tax refunds received in the year but notpreviously estimated to be recoverable and changes to statutory tax ratesresulting in one-time adjustments to the deferred income tax values. Asexpected, during 2006 income taxes moved closer to statutory levels less thepositive impact of tax credits received on R&D expenditures.

Net cash flow fromoperating activities continues to grow with the increased volumes, subject tothe required investment in working capital to support the ramp-up inbusiness.  Net operating flows tend to be

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higher in the latter halfof a year as incentive awards, insurance payments and tax installments tend tobe made early in a year.

Capital expenditures tendto rise during and after shutdown periods (usually in the third quarter) whenmost installation activities take place. Information technology and SAPspending to upgrade both platforms accelerated in the second half of 2006.

**OUTLOOK**

*Thefollowing section contains numerous forward-looking statements specificallypertaining to guidance. Management has included a narrative of the underlyingfactors and assumptions on which the forward-looking statements are based.While management believes that the basis for these forward-looking statementsis reasonable, they are based on information currently available to managementand, accordingly, actual results could differ materially from theforward-looking statements (see **Forward-LookingStatements** below for factors that could cause our results orperformance to differ materially from a conclusion, forecast or projection inthe forward-looking statements).*

The Company’s ability toforecast revenue over shorter-term periods, especially quarterly targets, isvery difficult and less accurate during periods in which significant changesare made to production schedules, whether due to production issues or changesto the size or timing of customer demand. While delays in receiving componentparts are not unusual, when combined with production issues or customer timingchanges, they can significantly impact revenues compared to forecasts for agiven period. Furthermore, due to the complexity of sterile manufacturing andthe rigors and demands of the quality testing and release process, anticipatedshipment dates and the accompanying revenues can change from period to periodbased on the independent quality control process.  Accordingly, the Company does not and doesnot plan to provide specific quarterly guidance.

The Company’s annualguidance is based on the information available when it receives annualizedcustomer forecasts or estimates of demand. During the course of the year,changes to these forecasts and customer demand, which are out of the control ofthe Company, can result in revisions to production schedules.  In addition, unforeseen production problemscan potentially cause variations from revenue forecasts and ultimately EPSestimates. Customer forecasts can change positively or negatively based onseveral factors such as the ability of our customers to obtain regulatoryapproval, the success of the product produced for them in the marketplace and regulatorychanges affecting product demand (see *Forward-LookingStatements*).

**ConsolidatedGuidance**

***2006 Guidance Achievements***

The Company originallyprovided EPS guidance of between 23 and 27 cents for 2006. In conjunction withthe release of the results for the third quarter of 2006, the Company thenexpected to achieve EPS closer to the higher end of its original guidancerange. The final results for 2006 not only achieved the higher end of theguidance range but exceeded it by 1 cent. The Company was able to exceed theguidance range mainly due to strong fourth quarter production performance andthe timing of customer demand in the contract manufacturing business as well asforeign exchange gains on U.S. dollar denominated monetary items. The stronger thananticipated volumes in 2006 due to the timing of requirements from our majorcustomers, including Genzyme and GSK, have resulted in lower preliminary volumeforecasts from these customers for 2007 relative to 2006. These preliminaryvolume forecasts are considered in our guidance range for 2007. The actualvolume requirements will be determined by the timing of end-user demand andsupply chain management decisions and can vary materially from preliminaryforecasts. Both factors are outside of the Company’s control.

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The Company alsosuccessfully achieved its net operating cash flows target of at least $15million by attaining $16.5 million in net operating cash flows for 2006.

***2007 Guidance***

As indicated in priordisclosures, substantially all revenues related to the amortization ofpreviously received *Anipryl®*milestones (see *Corporate and Other*)terminated on December 31, 2006. The amortization of these deferred revenueshas previously resulted in non-cash revenues of $0.8 million per quarter or$3.3 million per year. The termination of the amortization of deferred revenueshad no effect on cash flows but had the impact of contributing 7 cents a shareto 2006’s reported EPS.

As of February 23, 2007,the forecast information received by the Company from several major customersincludes variable factors and assumptions, such as size of requirements andtiming of regulatory approvals, that significantly impact overall forecastreliability to a degree that the Company is unable to provide reasonablerevenue guidance.  However, based on thecurrent information available, EPS is expected to range between 23 and 27 centsfor 2007 as compared with 21 cents in 2006 adjusted for the exclusion of theamortization of *Anipryl®* deferred revenues.  This is the same guidance range we gave for2006 but now excludes approximately 7 cents of EPS from *Anipryl®*deferred revenues.

While the Company doesnot plan to provide quantitative quarterly guidance, the Company expects thefirst quarter results for 2007 to be weaker compared to the fourth quarter of2006.  The main reason is a delay inreceiving component parts related to *Hectorol®Injection* creating a production delay for this product. Due tosufficient customer inventory levels, the delay does not create any issues inthe end-user market. However, it will have an impact on short-term results ofthe Company and the contract manufacturing segment. This has been factored intoour overall consolidated guidance range.

The Company’s formalcontractual arrangements with Genzyme for the production of *Hectorol® Injection* will terminate inMarch 2008. The Company expects continuing production of *Hectorol® Injection* for Genzyme beyondthis date.  The actual volumes expectedto be produced and shipped are dependent on the usual factors affectingend-user demand including reimbursement policies and customer supply chainmanagement practices. Accordingly, *Hectorol®Injection* volumes are subject to a high degree of variabilitybetween now and 2009. While the Company may continue producing *Hectorol® Injection* over a long-termperiod, the Company is planning for the eventual phase out of *Hectorol® Injection* volumes over time withsuch capacity to be eventually filled by other products and customers.

Since the *Anipryl®* deferred revenues represent a non-cash source ofearnings in 2006, the Company believes that net operating cash flow is areasonable metric to measure growth on a year-over-year basis. Net operatingcash flow is expected to be at least $20 million for 2007 subject, as always,to working capital requirements to support business growth.

***Sources of Future Growth***

The Company’s guidancefor 2007 represents core growth in operations. The Company believes that futureadditional growth for 2008 and beyond will come from the success of one or moreof the many initiatives that have been developed over the past few years andthat we continue to develop.  Thefollowing potential opportunities do not include any potential merger and/oracquisition activities and are not listed in any particular order as thepotential financial impact of each can vary materially over time:

·                  Conclusionof a strategic alliance with a commercial partner in Europe for the sales andmarketing of the four product files currently under review by the Europeanregulatory authorities. These are files for products currently sold in the U.S.or Canada.

·                  Thefiling for approval of a generic form of Sestamibi in the U.S., Europe andCanada followed by its introduction into those marketplaces.

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·                  Completionof the development of proprietary technology for a second-generation TechnetiumGenerator and licensing it to others for distribution.

·                  Clinicaltrials for a new formulation of *INFECTON®*targeted to orthopaedic indications subject to final analysis andrecommendations of an expert panel.

·                  Submissionto the FDA for approval of an improved radiopharmaceutical (cold kit) productfor bone scan imaging and introduction into the U.S. marketplace.

·                  Completionof clinical trials for I-131 MIBG for the diagnosis and treatment of neuroblastomaand related malignancies and its subsequent sale and distribution in NorthAmerica.

·                  Completionof negotiations followed by product transfers for the manufacture of a newportfolio of non-sterile products.

·                  Developmentand approval of additional generic imaging products that have now ceased orwill shortly cease to be protected by patent.

·                  Expansionof manufacturing capacity at the Montreal facility to accommodate new businessopportunities.

**Other**

The Board of Directorsbelieves that the Company’s shares trade well below their real value and thatthe trading price of the shares does not reflect the potential inherent valuein the Company’s core competencies. Accordingly, the Board of Directors has authorized a Normal CourseIssuer Bid and is considering other strategies to enhance the trading value ofits shares, including a sustainable dividend policy, although no commitment hasbeen made to do so.

**ACCOUNTING MATTERS**

**Critical Accounting Policies and Estimates**

The foregoing discussionand analysis of the financial condition and results of operations is based uponthe Company’s Consolidated Financial Statements, which have been prepared inaccordance with U.S. GAAP. The preparation of Consolidated Financial Statementsrequires the Company to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. On an ongoing basis, the Companyevaluates its estimates and makes adjustments as appropriate. Actual resultsmay differ from these estimates.

A summary of thesignificant accounting policies and methods used by the Company in thepreparation of its Consolidated Financial Statements is included in Notes 2 and3 to the 2006 audited Consolidated Financial Statements. The Company believesthe following critical accounting policies affect its more significantjudgments and estimates used in the preparation of its Consolidated FinancialStatements.

***Recognition of Licensing Revenue***

License and other formsof non-refundable fees received pursuant to collaboration agreements areaccounted for according to the related contractual agreements. In general, suchfees are deferred and recognized on a straight-line basis over the contractperiod. Where the contract period is not defined, such fees are recognized on astraight-line basis over the estimated term, during which contractual benefitsare expected to be derived. If payment of such fees is contingent upon futureperformance obligations of the Company or other future events, revenuerecognition of such amounts is deferred and recognized upon completion of thespecific event.

***Deferred Tax Assets***

Realization of the netdeferred tax assets is dependent on the Company’s ability to generatesufficient taxable income in certain tax jurisdictions. Management believesthat it is more likely than not that the 

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assets will be realized,based on forecasted income.  On aquarterly basis, the estimates and assumptions underlying the forecasted incomeare reviewed by management to determine whether additional valuation allowancesare warranted or valuation allowances are still required. The Company has takenvaluation allowances related to tax loss carryforwards in jurisdictions wheretaxable income is no longer generated, it is not likely to generate sufficienttaxable income in Canada to utilize Canadian tax loss carryforwards prior toexpiry, and filing positions taken with taxation authorities are subject toreview. Changes to estimates of future taxable income, the completion ofreviews by taxation authorities and the ability to execute on tax planningopportunities can significantly affect the amount of valuation allowances.

***Allowance for Doubtful Accounts***

The Company determines anappropriate allowance for doubtful accounts based on an account-by-accountreview as opposed to a general provision assessed as a percentage of revenues.

***Provision for Inventory Obsolescence***

Provisions for inventoryare charged against income when it is determined that specific inventory itemsdo not meet the defined quality and regulatory requirements for sale.  The Company does not make general provisionsfor inventory obsolescence.

**ForeignExchange Risk**

The Company’s reportingcurrency is the U.S. dollar. The functional currency for its Canadianoperations — which include the radiopharmaceutical segment, the contractmanufacturing segment and royalties and milestones related to product rightssold to Shire — is the Canadian dollar. Accordingly, the Company’s foreignexchange exposure for accounting purposes mainly relates to U.S.-denominatedmonetary assets of these operations. The Company currently does not activelyhedge this exposure, but reduces the exposure by maintaining the minimum levelof U.S.-denominated cash available to meet its short-term cash requirements.

**Recent Accounting Pronouncement**

In July 2006, the Financial Accounting StandardBoard (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertaintyin Income Taxes” (“FIN 48”). FIN 48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. TheInterpretation also provides guidance on de-recognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition. FIN 48 is effective in fiscal years beginning after December 15,2006. The provisions of FIN 48 are to be applied to all tax positions uponinitial adoption, with the cumulative effect adjustment reported as anadjustment to the opening balance of retained earnings. We are currentlyevaluating the potential impact, if any, that the adoption of FIN 48 will haveon our Consolidated Financial Statements.

**Non-GAAP Financial Measures**

The Company now focuses onGAAP measures both in reporting externally and monitoring managementperformance. Specifically, the Company measures divisional performance andconsolidated performance based on gross profit margin, operating income, netincome and operating cash flow. Non-GAAP financial measures and, specifically,EBITDA will continue to be disclosed to provide a comparative link between ourhistorical disclosures as the Company transitions to more traditional GAAPmeasures. The Company will continue to reconcile any non-GAAP financialmeasures used with GAAP line items.

The Company additionallyhas incorporated, as a performance measure, cash flows from operatingactivities less cash flows used in investing activities.

The terms EBITDA andEBITDA margin (EBITDA divided by total revenues) do not have a standardizedmeaning prescribed by U.S. GAAP and therefore may not be comparable to similarmeasures used by other companies.  DRAXISdefines EBITDA as operating income before depreciation and amortization 

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expense and EBITDA ispresented on a basis that is consistent from period to period.  DRAXIS uses EBITDA measures to assess theoperating performance of its ongoing businesses without the effects ofamortization expense. Amortization expense is excluded because it substantiallydepends on the accounting methods and assumptions used as well as thehistorical cost of capital assets. DRAXIS believes that certain shareholders and investors prefer suchmeasures in evaluating the ability of a reporting company to service debt or asthe basis for a valuation measurement. EBITDA should not be construed as the equivalent of net cash flows fromoperating activities.  The mostcomparable U.S. GAAP earnings measure is operating income.

**FORWARD-LOOKING STATEMENTS**

This MD&A contains forward-lookingstatements within the meaning of Section 27A of the *SecuritiesAct of 1933*, as amended (the “Securities Act”), and as contemplatedunder the *Private Securities LitigationReform Act of 1995* and other applicable securities legislation.These statements are not guarantees of future performance. By their nature,forward-looking statements involve numerous assumptions, known and unknownrisks, uncertainties and other factors that may cause the actual results orperformance of the Company to be materially different from such statements orfrom any future results or performance implied thereby. Factors that couldcause the Company’s results or performance to differ materially from aconclusion, forecast or projection in the forward-looking statements include,but are not limited to:

·                  theachievement of desired clinical trial results related to the Company’s pipelineproducts;

·                  timelyregulatory approval of the Company’s products;

·                  theability to comply with regulatory requirements applicable to the manufactureand marketing of the Company’s products;

·                  theCompany’s ability to obtain and enforce effective patents;

·                  thenon-infringement of third party patents or proprietary rights by the Companyand its products;

·                  factorsbeyond our control that could cause interruptions in our operations in oursingle manufacturing facility (including, without limitation, materialequipment breakdowns);

·                  reimbursementpolicies related to health care;

·                  theestablishment and maintenance of strategic collaborative and commercialrelationships;

·                  theCompany’s dependence on a small number of key customers;

·                  thedisclosure of confidential information by our collaborators, employees orconsultants;

·                  thepreservation of healthy working relationships with the Company’s union andemployees;

·                  theCompany’s ability to grow the business;

·                  thefluctuation of our financial results and exchange and interest ratefluctuations;

·                  theadaptation to changing technologies;

·                  theloss of key personnel;

·                  theavoidance of product liability claims;

·                  theloss incurred if current lawsuits against us succeed;

·                  thevolatility of the price of our common shares;

·                  marketacceptance of the Company’s products; and

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·                  therisks described in “Item 3. Key Information - Risk Factors” in this AnnualReport.

For additionalinformation with respect to certain of these and other factors, and relating tothe Company generally, reference should be made to the Company’s most recentfilings with the United States Securities and Exchange Commission (available onEDGAR at www.sec.gov) and the filings made by the Company with Canadiansecurities regulators (available on SEDAR at www.sedar.com).  The forward-looking statements contained inthis document represent the Company’s expectations as at February 23,2007.  Unless otherwise required byapplicable securities laws, the Company disclaims any intention or obligationto update or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.

**Item 6.    Directors, Senior Management and Employees**

The following is a list of the current directors and senior officers ofthe Company, their municipalities of residence, their current position with theCompany and their principal occupations:
| **Martin Barkin**                                                           |   | Ontario, Canada |   | President and Chief Executive Officer |
|-----------------------------------------------------------------------------|--------|-----------------|--------|---------------------------------------|
| Director since May 19, 1992 and employee of the  Company since March, 1992. |

 

                Dr. Barkin, MD, B.Sc. (MED.),MA, FRCSC, is President and Chief Executive Officer of the Company.  As of February 8, 2006, he became a member ofthe Board of Allon Therapeutics Inc. (TSX: NPC). Dr. Barkin is a member of theBoard of Directors and of the Compensation and Governance and NominatingCommittees of Allon Therapeutics Inc. Dr. Barkin served on the Board of Viventia Biotech Inc. until December30th, 2005, at whichdate Viventia Biotech Inc.’s shares were delisted from the TSX and Dr. Barkinceased to be a director.  Dr. Barkin wasChairman of the Board of Sunnybrook & Women’s College Health SciencesCentre from June 15, 1998 until June 30, 2003. Dr. Barkin came to the Company in 1992 from KPMG where he was Partnerand National Practice Leader for Health Care. Before that, he was Deputy Minister of Health for the Province ofOntario and before that President and Chief Executive Officer of SunnybrookHealth Sciences Centre at the University of Toronto.  Dr Barkin is a surgical specialist in Urologyholding the rank of Professor at the University of Toronto, a former ResearchScientist at University of Toronto and was Division Chief at Sunnybrook HealthSciences Centre.
| **Leslie L. Dan**                 |   | Ontario, Canada |   | Director |
|-----------------------------------|--------|-----------------|--------|----------|
| Director since December 10, 1993. |

 

                Mr. Dan is Chairman of NovopharmLimited, one of Canada’s leading pharmaceutical companies and Chairman ofViventia Biotech Inc.  Prior toApril 5, 2000, Mr. Dan was Chairman and Chief Executive Officer ofNovopharm Limited.  He is also a memberof the Board of Directors of Teva Pharmaceutical Industries Limited (NASDAQ:TEVA).
| **George M. Darnell**             |   | Florida, United States |   | Director |
|-----------------------------------|--------|------------------------|--------|----------|
| Director since November 26, 1996. |

 

                Mr. Darnell is the retiredPresident of the Dade Division and the retired Executive Vice President of theBaxter Diagnostics Group of Baxter International.  He has over 35 years of U.S. andinternational experience in the diagnostic industry.
| **Rolf H. Henel**               |   | New Jersey, United States |   | Director |
|---------------------------------|--------|---------------------------|--------|----------|
| Director since August 14, 2002. |

 

                Mr. Henel is theretired President of Cyanamid International, Lederle Division.  He currently serves as an advisor to thehealthcare industry and is a partner in Naimark & Associates, a healthcare 

76

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consulting firm.  He is also adirector and Chairman of the Compensation and Nominating and CorporateGovernance Committees of SciClone Pharmaceuticals, Inc. (NASDAQ: SCLN) and adirector, Chairman of the Compensation Committee and member of the Audit andNominating and Corporate Governance Committees of Penwest Pharmaceuticals Co.(NASDAQ: PPCO).
| **Brian M. King**            |   | Ontario, Canada |   | Chairman and Director |
|------------------------------|--------|-----------------|--------|-----------------------|
| Director since May 26, 1994. |

 

                Mr. King is Chairman of theBoard of Directors of the Company.  He isthe former Chairman and Chief Executive Officer of Connaught Biosciences,Inc.  He is also a director and Chairmanof the Compensation Committee of Onex Corporation (TSX: OCX) and a director andmember of the Investment, Valuation and Audit Committees of VenGrowthInvestment Funds.
| **Samuel Sarick**              |   | Ontario, Canada |   | Director |
|--------------------------------|--------|-----------------|--------|----------|
| Director since March 31, 1989. |

 

                Mr. Sarick is President ofSamuel Sarick Limited, a company with long-standing involvement in commercialproperty development.
| **Bruce W. Simpson**            |   | Texas, United States |   | Director |
|---------------------------------|--------|----------------------|--------|----------|
| Director since August 14, 2002. |

 

                Mr. Simpson served as the President of the Genpharmdivision of E Merck, the President and CEO of Medeva Pharmaceuticals in theUnited States and in senior management positions at Fisons Corporation.  He currently heads a private consulting firmspecializing in marketing and business development within the healthcareindustry and is a director of Hi-Tech Pharmacal Co., Inc. (NASDAQ: HITK).
| **John A. Vivash**                |   | Ontario, Canada |   | Director |
|-----------------------------------|--------|-----------------|--------|----------|
| Director since November 17, 1998. |

 

                Mr. Vivash was formerlyPresident and Chief Executive Officer of CIBC Securities Inc., FidelityInvestments Canada Limited and Manulife Securities International Ltd.  He currently serves as President and ChiefExecutive Officer of Tesseract Financial Inc., a financial servicesconsultancy, and director and member of the Nominating and Corporate GovernanceCommittee of Cangene Corporation (TSX: CNJ). He is also a member of the Board of Directors, the Audit Committee and theConduct Review Committee of State Street Trust Company Canada.
| **Mark Oleksiw**         |   | Québec, Canada |   | Officer |
|--------------------------|--------|---------------------|--------|---------|
| Officer since July 2003. |

 

                Mr. Oleksiw joined DRAXIS asDirector of Finance in July 2002 after eight years with an internationalaccounting firm, most recently as a senior manager with a focus on U.S. andCanadian publicly listed life science and technology companies.  He also spent three years with Bell Canadaand BCE Inc. with responsibility for external reporting, plus two years as asenior internal auditor at McGill University. Mr. Oleksiw is a Chartered Accountant and earned his Graduate Diploma inPublic Accountancy and B. Comm. from McGill University.  He became Chief Financial Officer on July 1,2003.
| **Dan Brazier**            |   | Ontario, Canada |   | Officer |
|----------------------------|--------|-----------------|--------|---------|
| Officer since August 1998. |

 

                Mr. Brazier, Hon. B. Comm.,joined DRAXIS in August 1998 as President of SpectroPharm Dermatology and nowholds the position of Chief Operating Officer. Prior to July 1, 2003, Mr. Brazier 

77

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servedas President of DRAXIS Pharmaceutica. Prior to joining the Company, Mr. Brazier was the Director of Skin Careat Allergan Inc.  Mr. Brazier also heldpositions in Marketing Management and Sales Management in his 10 years withAllergan.  From 1980-1989, Mr. Brazierheld Marketing and Sales positions with Bausch & Lomb, Stafford Foods andCanada Packers. Mr. Brazier holds an Honors B. Comm., majoring in Marketing andFinance.
| **Jack A. Carter**            |   | Ontario, Canada |   | Officer |
|-------------------------------|--------|-----------------|--------|---------|
| Officer since September 1998. |

 

                Mr. Carter, B.A., C.H.R.P.,joined DRAXIS in September 1998 as Vice President Human Resources following alengthy relationship with the Company in a Consultant capacity.  He is now Vice President, Administration andShared Services.  Immediately prior tojoining DRAXIS, Mr. Carter was the President of a Human Resource Consultingfirm, specializing in strategic human resource issues within the CanadianPharmaceutical Industry.  Prior to thisMr. Carter gained significant experience as Vice President Human Resources forSterling Drug/Kodak, Director of Human Resources for the Baxter Corporation,and Director of Human Resources for Johnson & Johnson.  Mr. Carter also served on the founding Boardof Directors of the Human Resources Professionals Association of Ontario, andwas nominated to the “Council of Human Resource Executives” for The ConferenceBoard of Canada.
| **John Durham**          |   | Québec, Canada |   | Officer |
|--------------------------|--------|---------------------|--------|---------|
| Officer since July 2003. |

 

                Mr. Durham is President ofDRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.  Prior to joining the Company in July 2003,Mr. Durham was General Manager of an international contract manufacturer, withresponsibilities for operations, finance, sales and marketing, businessdevelopment and strategic planning.
| **Jean-Pierre Robert**  |   | Québec, Canada |   | Officer |
|-------------------------|--------|---------------------|--------|---------|
| Officer since May 2005. |

 

                Mr. Robert, B.Sc., is Presidentof DRAXIMAGE, a division of DRAXIS Specialty Pharmaceuticals Inc. Prior tojoining DRAXIS, he served as Vice President and General Manager of TycoHealthcare (Canada), overseeing domestic and export operations, following itsacquisition of Mallinckrodt (Canada), where he held the same position. Mostrecently, Mr. Robert was President and CEO of an emerging Canadian biopharmaceuticalcompany. He has extensive healthcare industry experience including executive,general management, marketing and sales roles involving diagnostic,pharmaceutical, chemical and laboratory products with Mallinckrodt, FisherScientific, Hoechst and Bayer. He holds a B.Sc. and was a member of theCanadian Society of Nuclear Medicine.
| **Jerry Ormiston**      |   | Ontario, Canada |   | Officer |
|-------------------------|--------|-----------------|--------|---------|
| Officer since May 2001. |

 

                Mr. Ormiston, B.Sc., MBA, joinedDRAXIS in May 2001 as Executive Director, Investor Relations following twoyears as a senior consultant in a Toronto investor relations firm working withsmall and mid-sized entrepreneurial companies on capital markets communicationsstrategies.  Prior to that he was atAllelix Biopharmaceuticals for 12 years — four as Manager of Investor Relationsand eight in the business development area. He has 32 years’ experience in the healthcare industry inpharmaceuticals and biotechnology.  Hisassignments over those years have included positions in business development,marketing, corporate communications, production management, quality assuranceand regulatory affairs.

78

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| **Alida Gualtieri**          |   | Québec, Canada |   | Officer |
|------------------------------|--------|---------------------|--------|---------|
| Officer since November 2003. |

 

                Ms. Gualtieri joined the Companyin November 2003 as General Counsel and Secretary.  Prior to joining the Company, she was apartner in the Corporate Finance Mergers & Acquisitions group of McCarthyTétrault LLP in Montreal, Quebec, Canada’s largest law firm.  Between March 1996 and August 1999, Ms.Gualtieri was legal counsel at Fonds de Solidarité des Travailleurs du Québec(F.T.Q.), Canada’s largest labor-sponsored venture capital fund.  Ms. Gualtieri earned her BCL and LLB lawdegrees at McGill University in 1987 and was admitted to the Bar of theProvince of Quebec in 1988.
| **Chien Huang**          |   | Ontario, Canada |   | Officer |
|--------------------------|--------|-----------------|--------|---------|
| Officer since July 2003. |

 

                Mr. Huang joined DRAXIS in 1998as Assistant Controller.  On July 1,2003, he was promoted to Vice President Finance.  He has eight years of prior experience,including positions as manager of business process re-engineering, seniorfinancial planning and analysis and in the audit group of a major internationalaccounting firm.  Mr. Huang is aChartered Accountant and earned his Graduate Diploma in Public Accountancy fromMcGill University as well as a B.Sc. from the University of Toronto.

                Terms of office as director arefor one year or until the next Annual Meeting of the Shareholders andsubsequent Meeting of the Board of Directors, respectively.

                There is no family relationshipbetween any of the executive officers. Officers of the Company serve at the pleasure of the Board of Directors.

**Summary Compensation Table**

                The following table sets forth all annual andlong-term compensation for services in all capacities to the Company and itssubsidiaries for the fiscal years ended December 31, 2006, 2005 and 2004 inrespect of each of the individuals who were, at December 31, 2006, the ChiefExecutive Officer, the Chief Financial Officer, and each of the Company’s threemost highly compensated executive officers other than the CEO and CFO and whoreceived salary and bonus in excess of CDN$150,000 in the 2006 fiscal year (the“Named Executive Officers”).

79

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|                                                            | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Long Term  Compensation** | ** ** | ** **                                   | ** ** |
|------------------------------------------------------------|------------|------------|------------|------------------------------|------------|----------------------------------|------------|----------------------------------------------|------------|
| ** **                                                 | ** ** | ** ** | ** ** | **Salary**                   | ** ** | **Bonus**                        | ** ** | **Other Annual   Compensation(1)** | ** ** | **Long Term  Compensation   Awards** | ** ** | **LTIP  Payouts** | ** ** | **All Other  Compensation** | ** ** |
| **Name & Principal  Position**               | ** ** | **Year**   | ** ** | **Cash  (CDN$)**             | ** ** | **DSU  Election  (2)  (CDN$)**   | ** ** | **Cash  (CDN$)**                             | ** ** | **DSU  Election  (2)  (CDN$)** | ** ** | **(CDN$)** | ** ** | **Securities Under  Options  Granted  (# of  common  shares)** | ** ** | **(CDN$)** | ** ** | **(CDN$)** | ** ** |
| Martin Barkin, MD President  & Chief Executive Officer |       | 2006       |       | 468,750                      |       | nil                              |       | 219,633                                      |       | nil |   | 25,053 |   | 50,000 |   | nil |   | 156,873 | (3) |
|                                                            |       | 2005       |       | 450,000                      |       | nil                              |       | 91,432                                       |       | nil |   | 23,355 |   | 50,000 |   | nil |   | 1,611,000 | (4) |
|                                                            |       | 2004       |       | 400,000                      |       | nil                              |       | 154,600                                      |       | nil |   | 40,880 |   | nil |   | nil |   | 711,525 | (5) |
| Mark Oleksiw Chief Financial Officer                       |       | 2006       |       | 232,500                      |       | nil                              |       | 87,150                                       |       | nil |   | 12,391 |   | 25,000 |   | nil |   | nil |   |
|                                                       |       | 2005       |       | 225,000                      |       | nil                              |       | 37,587                                       |       | nil |   | 11,150 |   | 25,000 |   | nil |   | nil |   |
|                                                       |       | 2004       |       | 200,000                      |       | nil                              |       | 65,320                                       |       | nil |   | 8,217 |   | nil |   |   |   | 16,434 | (6) |
| Dan Brazier Chief  Operating Officer                       |       | 2006       |       | 320,000                      |       | nil                              |       | 122,957                                      |       | 100,000 | (7) | 15,694 |   | 25,000 |   | nil |   | nil |   |
|                                                            |       | 2005       |       | 290,000                      |       | nil                              |       | 48,333                                       |       | nil |   | 13,666 |   | 75,000 |   | nil |   | 61,475 | (8) |
|                                                            |       | 2004       |       | 254,500                      |       | nil                              |       | 85,218                                       |       | nil |   | 19,533 |   | 100,000 |   | nil |   | Nil |   |
| John Durham President, DRAXIS Pharma division              |       | 2006       |       | 300,000                      |       | nil                              |       | 116,160                                      |       | nil |   | 16,229 |   | 25,000  |   | nil |   | nil |   |
|                                                       |       | 2005       |       | 300,000                      |       | nil                              |       | 15,650                                       |       | nil |   | 14,386 |   | 25,000 |   | nil |   | nil |   |
|                                                       |       | 2004       |       | 262,000                      |       | nil                              |       | 95,380                                       |       | nil |   | 20,636 |   | nil |   | nil |   | nil |   |
| Jean-Pierre Robert President,  DRAXIMAGE division          |       | 2006       |       | 296,250                      |       | nil                              |       | 101,929                                      |       | nil |   | 10,409 |   | 25,000 |   | nil |   | nil |   |
|                                                            |       | 2005       | (9)        | 183,606                      |       | nil                              |       | 45,206                                       |       | nil |   | 594 |   | 100,000 |   | nil |   | nil |   |

----

(1)                                  “Other Annual Compensation” includes payment ofinsurance premiums and a payment equal to 5% of the Named Executive Officers’base salary from the period of January 1st, 2006 to April 30th, 2006 and 4%from the period of May 1st, 2006 to December 31st, 2006 for RRSP purposes inaccordance with the terms of their employment with the Company.  Prior to May 1st, 2006, the payments equaled5% of the Named Executive Officers base salary.

(2)                                  Amounts in these columns relate to the portionsof salary and bonus elected to be received in the form of Deferred Share Units(“DSU”) and are in addition to the cash amounts specified.  See “Incentive Plans — Deferred Share UnitPlan”.

(3)                                  Dr. Barkin realized a non cash value of$156,873 from the exercise of 130,125 options in 2006.  This value is included in income for taxpurposes.

(4)                                  Dr. Barkin realized a non cash value ofCDN$1,291,000 from the exercise of 400,000 options in 2005.  This value is included in income taxpurposes.  In addition, $320,000 wascontributed pursuant to his Retirement Compensation Agreement.  See “Executive Compensation — EmploymentContracts and Termination of Employment”.

(5)                                  Dr. Barkin received CDN$480,000 in 2004 aspayment of his Retirement Compensation Allowance.  See “Executive Compensation - EmploymentContracts and Termination of Employment.” In addition, he realized an aggregate value of an amount of CDN$231,525from the exercise of 67,500 options in 2004. This value is included in income for tax purposes.

(6)                                  Mr. Oleksiw realized a non cash value of$16,434 from the exercise of 6,667 options in 2004.  This value is included in income for taxpurposes.

(7)                                  Mr. Brazier elected to receive his 2006 specialbonus of an amount of $100,000 in Deferred Share Units.  See “Incentive Plans — Deferred Share UnitPlan”.

(8)                                  Mr. Brazier realized a non cash value ofCDN$61,475 from the exercise of 15,000 options in 2005.  This value is included in income for taxpurposes.

(9)                                  Jean-Pierre Robert joined the Company asPresident of DRAXIMAGE, a division of DRAXIS Specialty Pharmaceuticals Inc. onMay 9, 2005.

**IncentivePlans**

### *Philosophy*

                The Company’s philosophy is tolink employee compensation to the success of the Company and to emphasize “atrisk” employee compensation.  Save andexcept for the Retirement Compensation 

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Allowancefor Dr. Barkin set forth under “Employment Contracts and Termination ofEmployment”, the Company does not provide any form of pension program to itssenior management.

                The Company has implemented thefollowing plans in an effort to achieve “at risk” employee compensation: StockOption Plan, Deferred Share Unit Plan, Employee Group Registered RetirementSavings Plan and Non-Executive Long Term Incentive Plan.

### *2006 Stock Option Plan*

Intention and Participants***—***This plan was approved by the Shareholders ofthe Company on May 18, 2006 to assist and encourage directors, officers andemployees of the Company and its subsidiaries to work towards and participatein the growth and development of the Company and its subsidiaries by providingsuch persons with the opportunity, through stock options, to acquire anownership interest in the Company.  Acopy of this plan is filed as Exhibit 4.58 to this Annual Report (Form20-F).

Maximum Common SharesIssuable — In 2006 the shareholders authorized, at the Company’s annualmeeting on May 18, 2006, the issuance of up to 1,500,000 common shares underthis plan.  As at March 19, 2007, 420,000options have been granted and are outstanding under this plan, representing1.0% of the Company’s issued and outstanding capital as at March 19, 2007.  As at March 19, 2007, 1,080,000 common sharesremain reserved for further option grants, representing 2.6% of the Company’sissued and outstanding capital as at such date. The maximum number of common shares that may be reserved for issuance toinsiders pursuant to options granted under the plan and any other sharecompensation arrangement is 10% of the number of common shares outstanding andthe maximum number of common shares that may be issued to insiders within oneyear period is 10% of the number of common shares outstanding.  The number of shares reserved for issuance toany one person, including insiders, pursuant to options granted in accordancewith the plan or otherwise cannot exceed 5% of the outstanding common shares ofthe Company.

Determination of Number, Price and Term of Options — The Board ofDirectors determines the price per common share, the number of options forcommon shares which may be allotted to each designated director, officer oremployee, the period in which any option may be exercised and all the terms andconditions of the option in accordance with the applicable requirements of anyregulatory authority or stock exchange.  Theexercise price of common shares subject to an option will be determined by theBoard at the time of grant and will not be less than the market price of thecommon shares at the Grant Date, calculated as the closing price of a board lotof the common shares on The Toronto Stock Exchange on the last trading dayimmediately preceding the Grant Date or, if the common shares did not trade onsuch last trading day, the average, rounded up to the nearest cent, of the bidand ask prices for a board lot of the Common Shares at the close of trading onsuch last trading day.

Dilution Guideline — The Company has anestablished guideline limiting the aggregate number of common shares that canbe issued at any point in time through the exercise of options to 13% of theCompany’s outstanding common shares.  Asat March 19, 2007, the number of common shares so issuable under the 2006 StockOption Plan and the Stock Option Plan of DRAXIS Health Inc. was 5.5% of theCompany’s outstanding common shares.

Vesting — The period during which any optionmay be exercised is determined by the Board of Directors at the time at whichthe option is granted and shall be no later than ten years fromthe grant date.

Assignability — Options are non-assignable andnon-transferable.

 

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Terminationof Employment, Permanent Disability or Death of an Option Holder — If an optionholder ceases to hold office as a director, officer or employee of the Companyduring an option period, the exercisable options may be exercised for a periodof thirty days after such option holder ceases to hold such office or positionor for a longer period as the Board of Directors may approve.  In the event of the total and permanentdisability of an option holder, the exercisable options may be exercised for a periodof six months after the date on which the Board of Directors has determinedthat the option holder is permanently disabled or for such longer period as theBoard of Directors may approve.  In theevent of the death of an option holder, the options that were exercisable atthe date of the death may be exercised by the option holder’s executors orpersonal representatives within six months of the option holder’s death or forsuch longer period as the Board of Directors may approve.

Amendment of plan — TheBoard of Directors may amend, suspend or terminate the 2006 Stock Option Planat any time provided that no such amendment, suspension or termination mayoccur without obtaining any required regulatory or shareholder approval orprejudice the rights of any option holder under any option previously grantedto the option holder without the consent or deemed consent of the optionholder.  An amendment to the amendingprovision of the plan will be presented to shareholders for approval at theAnnual Meeting.

Grant of Options in 2006 —No options were awarded under the 2006 Stock Option Plan in 2006.  Between January 1, 2007 and March 19, 2007,420,000 options were awarded under the 2006 Stock Option Plan.

### *Stock Option Plan of DRAXIS Health Inc.*

Options Available forFuture Grants**— Noadditional options are available for issuance under this Plan since the 2006Stock Option Plan was adopted on May 18, 2006.

Intention and Participants —This plan was approved by shareholders on February 3, 1988 and amended on June 27,2001 to permit the Board of Directors to grant options to purchase commonshares to directors, officers, employees and arm’s length consultants of theCompany and its subsidiaries so as to link corporate compensation to enhancedshareholder value.

Maximum Common SharesIssuable — In 2001 the shareholders authorized, at the Company’s annual andspecial meeting, the issuance of up to 7,500,000 common shares under thisplan.  As at March 19, 2007,1,884,660 options have been granted and are outstanding under this plan and thesame number of shares remain reserved for issuance, representing 4.5% of theCompany’s issued and outstanding capital as at that date.  The number of shares reserved for issuance toany one person, including insiders, pursuant to options granted in accordancewith the plan or otherwise cannot exceed 5% of the outstanding common shares ofthe Company.  No additional options areavailable for granting under this Plan since the 2006 Stock Option Plan wasadopted on May 18, 2006.

Determination of Number,Price and Term of Options — The Board of Directors determined the price percommon share, the number of options for common shares which may be allotted toeach designated director, officer, employee or arm’s length consultant, theperiod in which any option could be exercised and all the terms and conditionsof the option in accordance with the applicable requirements of any regulatoryauthority or stock exchange.  Noadditional options are available for granting under this Plan since the 2006Stock Option Plan was adopted on May 18, 2006.

Dilution Guideline — TheCompany established a guideline limiting the aggregate number of common sharesthat can be issued at any point in time through the exercise of options to 13%of the Company’s outstanding common shares. As at March 19, 2007, the number ofcommon shares so 

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issuable was 4.5% of the Company’soutstanding common shares.

Vesting — The period duringwhich any option could be exercised was determined by the Board of Directors atthe time at which the option was granted and is no later than ten years fromthe grant date.

Assignability — Options arenon-assignable and non-transferable.

Termination of Employment,Permanent Disability or Death of an Option Holder — If an option holder ceases tohold office as a director, officer or employee of the Company during an optionperiod, the exercisable options may be exercised for a period of thirty daysafter such option holder ceases to hold such office or position or for a longerperiod as the Board of Directors mayapprove.  In the event of the total andpermanent disability of an option holder, the exercisable options may beexercised for a period of six months after the date on which the Board ofDirectors has determined that the option holder is permanently disabled or forsuch longer period as the Board of Directors may approve. In the event of thedeath of an option holder, the options that were exercisable at the date of thedeath may be exercised by the option holder’s executors or personal representativeswithin six months of the option holder’s death.

Amendment of Plan — TheBoard of Directors may terminate the Stock Option Plan of DRAXIS Health Inc. atany time or amend the plan at any time with the consent of the TSX.  Security holder approval of termination of oramendments to the plan is not required by the terms of the plan.  An amendment to the amending provision of theplan will be presented to shareholders for approval at the Annual Meeting.

Aggregate Option Grants toNamed Executive Officers — 150,000 options under the Stock Option Planof DRAXIS Health Inc were awarded between January 1st and May 18, 2006 to Named Executive Officersand 180,000 options were awarded between January 1st and May 18, 2006 to other eligibleparticipants. As of May 18, 2006, no options have been awarded under this planand no further options shall be awarded under this plan.

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The following table sets forth all of the options ofthe Company granted during the financial year ended December 31, 2006:
| **Name**                                                     | ** ** | **Securities  Under  Options  Granted  (#)(1)** | ** ** | **% of Total   Options Granted  to  Employees in   Financial Year** | ** ** | **Exercise or Base  Price  (CDN$/Security)(2)** | ** ** | **Market Value of Securities  Underlying  Options on the  Date of Grant  (CDN$/Security)** | ** ** | **Expiration Date** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| Martin Barkin, MD  President & Chief   Executive Officer |       | 50,000                                          |       | 15.2                                                                                                   |       | CDN $5.05                                                 |       | CDN $5.05                                                                                                                     |       | December 31, 2010        |       |
| Mark Oleksiw Chief  Financial Officer                        |       | 25,000                                          |       | 7.6                                                                                                    |       | CDN $5.05                                                 |       | CDN $5.05                                                                                                                     |       | December 31, 2010        |       |
| Dan Brazier Chief  Operating Officer                         |       | 25,000                                          |       | 7.6                                                                                                    |       | CDN $5.05                                                 |       | CDN $5.05                                                                                                                     |       | December 31, 2010        |       |
| John Durham  President, DRAXIS  Pharma division              |       | 25,000                                          |       | 7.6                                                                                                    |       | CDN $5.05                                                 |       | CDN $5.05                                                                                                                     |       | December 31, 2010        |       |
| Jean-Pierre  Robert  President,  DRAXIMAGE  division         |       | 25,000                                          |       | 7.6                                                                                                    |       | CDN $5.05                                                 |       | CDN $5.05                                                                                                                     |       | December 31, 2010        |       |

----

(1)All of the above options have a three year vesting period with one-third of theoptions vesting in each of the three years from the date of grant. All optionswere granted in accordance with the Stock Option Plan of DRAXIS Health Inc.

(2)The Exercise Price of the options was determined by the Board of Directors inaccordance with the provisions of the Stock Option Plan of DRAXIS Health Inc.

The following table sets forth individual exercises ofoptions by the Named Executive Officers during the financial year ended December31, 2006 and the financial year-end value of unexercised options:
| **Name**                                                   | ** ** | **Securities Acquired on Exercise** | *** *** | **Aggregate Value  (CDN$) Realized** | ** ** | **Unexercised Options at December 31, 2006 (#) Exercisable/ Unexercisable** | ** ** | **Value of Unexercised in-  the-Money Options at   December 31, 2006 (CDN$) Exercisable/ Unexercisable** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------|--------------|------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Martin Barkin, MD President  & Chief Executive Officer |       | 130,125                                  |         | 156,873                                        |       | 275,000/ 50,000                                                                                 |       | 374,000 / 19,000                                                                                                                                 |       |
| Mark Oleksiw Chief  Financial Officer                      |       | nil                                      |         | nil                                            |       | 38,333 / 125,000                                                                                |       | 30,883 / 335,500                                                                                                                                 |       |
| Dan Brazier Chief  Operating Officer                       |       | nil                                      |         | nil                                            |       | 126,667 / 208,333                                                                               |       | 177,983 / 378,167                                                                                                                                |       |
| John Durham President, DRAXIS Pharma division              |       | nil                                      |         | nil                                            |       | 25,000 / 125,000                                                                                |       | 4,750 / 335,500                                                                                                                                  |       |
| Jean-Pierre  Robert President, DRAXIMAGE division          |       | nil                                      |         | nil                                            |       | 16,667 / 108,333                                                                                |       | 4,750 / nil                                                                                                                                      |       |

 

### *DeferredShare Unit Plan*

Intention — To further align the interests of seniormanagement with those of shareholders by increasing management shareholdings atminimal cost to the Company.

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Mechanism — Eligible participants in this plan are entitledto elect yearly to receive up to 20% of base salary and up to 100% of any bonuspayable in respect of that year in Deferred Share Units in lieu of cashcompensation.  An election must be madeby December 1 of each year in respect of base salary and bonus for the nextyear.  The elected amount is converted toa number of Deferred Share Units equal to the elected amount divided by theclosing price of the common shares on the Toronto Stock Exchange or The NASDAQNational Market System on December 31 of each year, based on a purchasecommitment as of December 1 of the prior year. This plan is administered by the Board of Directors of the Company.

Participants — Members of senior management of theCompany designated by the Human Resources and Compensation Committee.

Redemption of Deferred Share Units — Participants arenot entitled to receive any Deferred Share Units until cessation of employmentwith the Company for any reason.  Thevalue of each Deferred Share Unit, redeemable by the participant, will beequivalent to the market value of a common share of the Company at the time ofredemption.  The Deferred Share Unitsmust be redeemed no later than the end of the first calendar year commencingafter the date of cessation of employment.

Named Executive Officer Elections for 2005, 2006 and2007 — The following table summarizes the elections under this plan by NamedExecutive Officers for the last three fiscal year of the Company:
| **DSU Elections** | ** ** |
|------------------------|------------|
| ** **             | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **             | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Salary** | ** ** | **Bonus** | ** ** |
| ** **             | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** |
| Martin Barkin(1)       |       | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | Nil |   | nil |   | nil |   | nil |   | Nil |   |
| Dan  Brazier(2)        |       | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | 100 |   | 100,000 |   | nil |   | nil |   | nil |   | nil |   |

----

(1)           Asat March 19, 2007, Dr. Barkin had atotal of 186,560 Deferred ShareUnits and the value of his interest in this plan at said date was CDN$1,277,936.

(2)           Asat March 19, 2007, Mr. Brazier had atotal of 19,802 Deferred Share Unitsand the value of his interest in this plan at said date was CDN$135,644.

### *EmployeeGroup Registered Retirement Savings Plan*

Intention — To provide a cost-sharing program foremployees of the Company and its subsidiaries by way of a corporate sponsoredregistered retirement savings plan (“RRSP”) matching mechanism for employeeretirement.

Mechanism — Commencing 12 months after continuousemployment, employees of the Company and its subsidiaries are entitled toreceive a discretionary payment from the Company which matches employeecontributions on a dollar-for-dollar basis towards an employee’s RRSP, up to amaximum of 5% of the employee’s eligible income (“normal” straight time annualearnings or salary, not to include overtime payments, bonus or any other formof exceptional payment).  The corporatecontribution to this plan remains under the ownership and control of theemployee and is not subject to any lock-in provisions.  The plan is administered by a committeecomposed of employees and management. Subject to the investment choices approved by the committee, employeescontrol the investment of the contributions of both the employees and theCompany.

Participants — Participation is open to all full andpart-time permanent Canadian employees of the Company and its subsidiaries,other than designated senior management employees and the Named ExecutiveOfficers.

Commencement Date — The plan commenced on January 1,2002, but employee matching contributions were not required for 2003, 2004 and2005.  In 2006, matching contributionswere required.

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### *Non-ExecutiveLong Term Incentive Plan*

Intention - This plan was approved by the Board ofDirectors on December 6, 2005.  Itspurposes are: (i) to align the interests of eligible employees with theinterests of the shareholders of the Company; (ii) to attract and retain keyemployees; and (iii) to ensure that key employees’ incentives and rewards areconsistent with the strategic business initiatives of the Company and toachieve divisional and corporate financial goals to enhance shareholder value.

Mechanism — The maximum plan award for any two-yearcycle is established by the Board of Directors at the beginning of each cycleand is a percentage of a participant’s average annual base salary for thecycle.  A portion of the maximum planaward is determined based on the Company’s cumulative earnings per share (“EPS”)target for the cycle (“Financial Portion”) and a portion of the maximum planaward is determined based on the performance of the individual participantduring the cycle (“Performance Portion”). The maximum percentage of the plan award comprised of the FinancialPortion and the maximum percentage of the plan award comprised of thePerformance Portion are identical for all participants within each cycle andare established by the Board of Directors. The portion of the maximum potential Financial Portion and the maximumpotential Performance Portion that a participant will be awarded depends uponthe EPS achieved during the cycle and whether the participant has achieved hisor her performance objectives, respectively. The plan is administered by the President and Chief Executive Officer ofthe Company under the supervision of the Board of Directors.  All plan awards are paid in cash within 90days of the end of a cycle.

Participants — Members of senior management of theCompany who are full time employees may be selected to participate in theplan.  Members of the Executive Committeeand those senior managers of the Company who participate in an establishedincentive or participation plan of the Company are excluded from participatingin this plan.  Each of the NamedExecutive Officers may not participate in the plan

## **Subsidiary Long-Term Incentive Plans**

### *DRAXIMAGE, a division of DRAXIS Specialty Pharmaceuticals Inc.*

Intention — To align further the interests of seniormanagement in DRAXIMAGE (formerly DRAXIMAGE Inc.), a division of DRAXISSpecialty Pharmaceuticals Inc. (“DRAXIMAGE”), for increasing the value of thedivision and therefore enhancing shareholder value of the Company as a whole.

Mechanism — The terms of this plan provide that,subject to the achievement of certain conditions, the Company will makepayments to plan participants in the form of cash based on the increase in thefair market value of DRAXIMAGE as of the date of the onset of the Plan and thedate of termination of the Plan.

Participants — Selected members of senior managementof DRAXIMAGE as designated by the Company. Mr. Jean-Pierre Robert participates in this plan but received no awardunder the plan in 2006.

### *DRAXISPharma, a division of DRAXIS Specialty Pharmaceuticals Inc.*

Intention — In September 2003, the then-existingEquity Participation Plan of DRAXIS Pharma Inc. (as of January 1, 2005 known asDRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.) wasterminated and replaced with a Long Term Equity Incentive Plan to providecertain senior 

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management employees of DRAXIS Pharma with a meaningful incentive toincrease the value of the Company and to allow management to share in thebenefits of that value creation.

Mechanism — The terms of this plan provide thateligible participants have a right to receive the cash value of phantom equityshares of DRAXIS Pharma on the plan expiry date or other designated terminationevent.  In order for an eligible participantto receive a termination distribution amount with respect to this plan, certainfinancial ratios must be met by DRAXIS Pharma.

Participants — Selected members of senior managementof DRAXIS Pharma as designated by the Company. Mr. John Durham participates in this plan but received no award underthe plan in 2006.

## **Compensationof Directors**

The compensationof the Board of Directors has not changed since January 1, 2005 at which timethe Company used a third-party survey related to Board compensation in Canadato determine what payments should be made to the Board of Directors.  During the 2006 year, each director, otherthan Dr. Martin Barkin, received an annual honorarium of $17,500 plus a meetingfee of $1,500 for each Board of Directors and Committee meeting attended,including the meetings attended via teleconference.  Related travel and out-of-pocket expenses toattend Board and Committee meetings were also paid to each director.  The members of the Special Committee createdin May 2006 were compensated $1,000 for each meeting they attended, includingthe meetings attended via teleconference and each received a retainer fee of$10,000 ($15,000 for the Chairman).** **In addition, the Chairs of each of the Human Resources and CompensationCommittee and the Nominating and Corporate Governance Committee received anannual retainer of $5,000.  TheChairman of the Audit Committee received an annual retainer of $10,000.  Directors who are employees of the Company donot receive any compensation in their capacity as directors.  For the year ended December 31, 2006, inaddition to the retainer of $5,000 received as Chairman of the Human Resourcesand Compensation Committee, Mr. Brian King received $95,000 as non-executiveChairman of the Board of Directors, $15,000 as the Chairman for the Special Committeeand $7,000 for attending meetings of the Special Committee.  He did not otherwise receive meeting fees asa director.

The followingtable sets forth the total compensation paid to each Director in the year endedDecember 31, 2006.  Martin Barkin, as anemployee of the Corporation, did not receive any compensation in his capacityas a director.

 
| ** **              | ** **   | **Leslie Dan** | ** **   | **George  Darnell (1,2)** | ** ** | **Rolf Henel  (1,2)** | ** **   | **Brian King  (3,4)** | ** **   | **Sam Sarick  (1,4)** | ** ** | **Bruce  Simpson  (1,3)** | ** **   | **John Vivash  (2,3,4)** | ** **   |
|-------------------------|--------------|---------------------|--------------|--------------------------------|------------|----------------------------|--------------|----------------------------|--------------|----------------------------|------------|---------------------------|--------------|-------------------------------|--------------|
| **Annual  Retainer**    |         | $                   | 17,500       |                           | $          | 17,500                     |         | $                          | 17,500       |                       | $          | 95,000                    |         | $                             | 17,500       |   | $ | 17,500 |   | $ | 17,500 |   |
| **Chairman  Retainer**  |         | —              |         | —                         |       | —                     |         | 5,000                      |         | 10,000                     |       | —                    |         | $                             | 5,000        |   |
| **Committee  Retainer** |         | —              |         | 5,000                          |       | 5,000                      |         | 15,000                     |         | 15,000                     |       | 5,000                     |         | $                             | 10,000       |   |
| **Committee  meetings** |         | —              |         | $                              | 13,500     |                       | $            | 12,000                     |         | 7,000                      |       | $                         | 11,500       |                          | $            | 12,000 |   | $ | 17,500 |   |
| **Board  meetings**     |         | $                   | 7,500        |                           | $          | 12,000                     |         | $                          | 12,000       |                       | —     |                      | $            | 12,000                        |         | $ | 12,000 |   | $ | 12,000 |   |
| **TOTAL**               | *** *** | ***$***             | ***25,000*** | *** ***                   | ***$***    | ***48,000***               | *** *** | ***$***                    | ***46,500*** | *** ***               | ***$***    | ***122,000***             | *** *** | ***$***                       | ***66,000*** | *** *** | ***$*** | ***46,500*** | *** *** | ***$*** | ***62,000*** | *** *** |
| **Options**             |         | 15,000              |         | 15,000                         |       | 15,000                     |         | 20,000                     |         | 15,000                     |       | 15,000                    |         | 15,000                        |         |

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(1)           Member of the Audit Committee(2)           Member of the Nominating andCorporate Governance Committee(3)           Member of the HumanResources and Compensation Committee(4)           Member of the SpecialCommittee created in May 2006

In December 2001, under theStock Option Plan of DRAXIS Health Inc., each of the directors (excluding thePresident and Chief Executive Officer) was awarded 15,000 options as partial 

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compensationfor services rendered as directors.  TheChairman was awarded an additional 5,000 options.  In the case of a regularly occurring award ofoptions such as those awarded to the Board on each January 1, the marketprice for exercise is based on the average closing price of the common shareson the TSX for the five trading days immediately preceding their grant date ineach year.  All other options are awardedat an exercise price which is the closing price of the common shares on the TSXimmediately preceding the grant date.

From time to time, special committees of the Board ofDirectors, such as the Special Committee constituted in May 2006, are appointedto consider special issues.  Compensationfor work on such committees is set based on the amount of work involved.

**Minimum Shareholding Requirements**

In June 2001, the Board of Directors established acorporate policy requiring each then current Director to acquire by June 2004(or in the case of future Board of Directors members, within three years oftheir appointment) common shares in the Company equal to five times his or herannual honorarium.  All directors who wereto comply with this requirement by June 2004 were in compliance as of saiddate.  In February 2005, the Board ofDirectors adopted a resolution amending this policy to fix the number of commonshares to be so held at 15,000. Compliance with this policy is monitored annually by the Nominating andCorporate Governance Committee.  As atDecember 31, 2006 and March 19, 2007, all directors were compliant with thispolicy.

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Director shareholdings as of March 19, 2007
| **Director**     | ** ** | **Shares Owned** | ** ** | **% Owned of total issued and  outstanding common shares** | ** ** |
|------------------|------------|-----------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| Martin Barkin(1) |       | 917,433               |       | 2.2                                                                                           |       |
| Leslie Dan       |       | 53,356                |       | < 1                                                                                        |       |
| George Darnell   |       | 104,875               |       | < 1                                                                                        |       |
| Rolf H. Henel    |       | 30,000                |       | < 1                                                                                        |       |
| Brian King       |       | 145,750               |       | < 1                                                                                        |       |
| Sam Sarick       |       | 930,724               |       | 2.2                                                                                           |       |
| Bruce W. Simpson |       | 20,000                |       | < 1                                                                                        |       |
| John Vivash      |       | 20,000                |       | < 1                                                                                        |       |
| Total            |       | 2,222,138             |       | 5.3                                                                                           |       |

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(1)                                  Inaddition, as of March 19, 2007, Dr. Barkin owns 186,560 Deferred Share Units ofthe Company (see “Incentive Plans — Deferred Share Unit Plan) and the value ofhis interest in this plan at said date was CDN$1,277,936.

Senior Managementshareholdings as of March 19, 2007

 
| **Senior Management** | ** ** | **Shares Owned** | ** ** | **% Owned of total issued and  outstanding common shares** | ** ** |
|----------------------------|------------|-----------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| Martin Barkin              |       | 917,433               |       | 2.2                                                                                           |       |
| Dan Brazier(2)             |       | 9,355                 |       | < 1                                                                                        |       |
| Jack A. Carter             |       | 0                     |       | nil                                                                                           |       |
| John Durham                |       | 0                     |       | nil                                                                                           |       |
| Jean-Pierre  Robert        |       | 0                     |       | nil                                                                                           |       |
| Alida Gualtieri            |       | 500                   |       | < 1                                                                                        |       |
| Chien Huang                |       | 0                     |       | nil                                                                                           |       |
| Mark Oleksiw               |       | 3,000                 |       | nil                                                                                           |       |
| Jerry Ormiston             |       | 84,100                |       | < 1                                                                                        |       |
| Total                      |       | 96,955                | (3)        | <  1                                                                                       |       |

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(2)**                                 **In addition, as at March 19, 2007, Mr. Brazier owns 19,802 Deferred Share Units andthe value of his interest in this plan at said date was CDN$135,644.

(3)                                  Excludesshares held by Dr. Barkin, which are included in the total of shares held bydirectors.

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Director outstanding options as of March 19, 2007

 
| Director          | ** ** | **# of Options** | ** ** | **Exercise Price** | ** ** | **Expiration Date** | ** ** |
|-------------------|------------|----------------------------|------------|-------------------------|------------|--------------------------|------------|
| Martin Barkin     |       | 50,000                     |       | CDN$5.73                |       | December 31, 2009        |       |
|                   |       | 50,000                     |       | CDN$5.05                |       | December 31, 2010        |       |
|                   |       | 50,000                     |       | CDN$5.62                |       | December 31, 2011        |       |
| Leslie L. Dan     |       | 15,000                     |       | CDN$2.33                |       | December 31, 2007        |       |
|              |       | 15,000                     |       | CDN$4.30                |       | December 31, 2008        |       |
|              |       | 15,000                     |       | CDN$5.73                |       | December 31, 2009        |       |
|              |       | 15,000                     |       | CDN$5.05                |       | December 31, 2010        |       |
|              |       | 15,000                     |       | CDN$5.62                |       | December 31, 2011        |       |
| George M. Darnell |       | 15,000                     |       | CDN$2.33                |       | December 31, 2007        |       |
|                   |       | 15,000                     |       | CDN$4.30                |       | December 31, 2008        |       |
|                   |       | 15,000                     |       | CDN$5.73                |       | December 31, 2009        |       |
|                   |       | 15,000                     |       | CDN$5.05                |       | December 31, 2010        |       |
|                   |       | 15,000                     |       | CDN$5.62                |       | December 31, 2011        |       |
| Rolf H. Henel     |       | 15,000                     |       | CDN$4.30                |       | December 31, 2008        |       |
|              |       | 15,000                     |       | CDN$5.73                |       | December 31, 2009        |       |
|              |       | 15,000                     |       | CDN$5.05                |       | December 31, 2010        |       |
|              |       | 15,000                     |       | CDN$5.62                |       | December 31, 2011        |       |
| Brian M. King     |       | 20,000                     |       | CDN$2.33                |       | December 31, 2007        |       |
|                   |       | 20,000                     |       | CDN$4.30                |       | December 31, 2008        |       |
|                   |       | 20,000                     |       | CDN$5.73                |       | December 31, 2009        |       |
|                   |       | 20,000                     |       | CDN$5.05                |       | December 31, 2010        |       |
|                   |       | 20,000                     |       | CDN$5.62                |       | December 31, 2011        |       |
| Samuel Sarick     |       | 15,000                     |       | CDN$2.33                |       | December 31, 2007        |       |
|              |       | 15,000                     |       | CDN$4.30                |       | December 31, 2008        |       |
|              |       | 15,000                     |       | CDN$5.73                |       | December 31, 2009        |       |
|              |       | 15,000                     |       | CDN$5.05                |       | December 31, 2010        |       |
|              |       | 15,000                     |       | CDN$5.62                |       | December 31, 2011        |       |
| Bruce W. Simpson  |       | 10,000                     |       | CDN$5.12                |       | April 30, 2007           |       |
|                   |       | 5,000                      |       | CDN$3.66                |       | August 13, 2007          |       |
|                   |       | 5,000                      |       | CDN$2.33                |       | December 31, 2007        |       |
|                   |       | 15,000                     |       | CDN$4.30                |       | December 31, 2008        |       |
|                   |       | 15,000                     |       | CDN$5.73                |       | December 31, 2009        |       |
|                   |       | 15,000                     |       | CDN$5.05                |       | December 31, 2010        |       |
|                   |       | 15,000                     |       | CDN$5.62                |       | December 31, 2011        |       |
| John A. Vivash    |       | 15,000                     |       | CDN$4.30                |       | December 31, 2008        |       |
|              |       | 15,000                     |       | CDN$5.73                |       | December 31, 2009        |       |
|              |       | 15,000                     |       | CDN$5.05                |       | December 31, 2010        |       |
|              |       | 15,000                     |       | CDN$5.62                |       | December 31, 2011        |       |
| **Total**         | ** ** | **675,000**                |       |                    |       |                     |       |

 

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Senior Managementoutstanding options as of March 19,2007
| Senior Management | ** ** | **# of Options** | ** ** | **Exercise Price** | ** ** | **Expiration Date** | ** ** |
|------------------------|------------|----------------------------|------------|-------------------------|------------|--------------------------|------------|
| Martin Barkin          |       | 50,000                     |       | CDN$5.73                |       | December 31, 2009        |       |
|                        |       | 50,000                     |       | CDN$5.05                |       | December 31, 2010        |       |
|                        |       | 50,000                     |       | CDN$5.62                |       | December 31, 2011        |       |
| Dan Brazier            |       | 100,000                    |       | CDN$2.36                |       | July 14, 2013            |       |
|                   |       | 100,000                    |       | CDN$4.70                |       | August 10, 2009          |       |
|                   |       | 25,000                     |       | CDN$5.73                |       | December 31, 2009        |       |
|                   |       | 50,000                     |       | CND$5.38                |       | October 2, 2015          |       |
|                   |       | 25,000                     |       | CDN$5.05                |       | December 31, 2010        |       |
|                   |       | 25,000                     |       | CDN$5.62                |       | December 31, 2011        |       |
|                   |       | 30,000                     |       | CDN$5.93                |       | February 11, 2012        |       |
| Jack A. Carter         |       | 15,000                     |       | CDN$5.73                |       | December 31, 2009        |       |
|                        |       | 15,000                     |       | CDN$5.05                |       | December 31, 2010        |       |
|                        |       | 15,000                     |       | CDN$5.62                |       | December 31, 2011        |       |
| John Durham            |       | 100,000                    |       | CDN$2.36                |       | July 14, 2013            |       |
|                   |       | 25,000                     |       | CDN$5.73                |       | December 31, 2009        |       |
|                   |       | 25,000                     |       | CDN$5.05                |       | December 31, 2010        |       |
|                   |       | 25,000                     |       | CDN$5.62                |       | December 31, 2011        |       |
| Jean-Pierre Robert     |       | 25,000                     |       | CDN$6.05                |       | May 10, 2010             |       |
|                        |       | 75,000                     |       | CDN$6.05                |       | May 10, 2015             |       |
|                        |       | 25,000                     |       | CDN$5.05                |       | December 31, 2010        |       |
|                        |       | 25,000                     |       | CDN$5.62                |       | December 31, 2011        |       |
| Alida Gualtieri        |       | 25,000                     |       | CDN$3.25                |       | November 3, 2008         |       |
|                   |       | 15,000                     |       | CDN$5.73                |       | December 31, 2009        |       |
|                   |       | 15,000                     |       | CDN$5.05                |       | December 31, 2010        |       |
|                   |       | 15,000                     |       | CDN$5.62                |       | December 31, 2011        |       |
|                   |       | 30,000                     |       | CDN$5.93                |       | February 11, 2012        |       |
| Chien Huang            |       | 50,000                     |       | CDN$2.36                |       | July 14, 2013            |       |
|                        |       | 15,000                     |       | CDN$5.73                |       | December 31, 2009        |       |
|                        |       | 15,000                     |       | CDN$5.05                |       | December 31, 2010        |       |
|                        |       | 15,000                     |       | CDN$5.62                |       | December 31, 2011        |       |
| Mark Oleksiw           |       | 100,000                    |       | CDN$2.36                |       | July 14, 2013            |       |
|                   |       | 25,000                     |       | CDN$5.73                |       | December 31, 2009        |       |
|                   |       | 25,000                     |       | CDN$5.05                |       | December 31, 2010        |       |
|                   |       | 25,000                     |       | CDN$5.62                |       | December 31, 2011        |       |
|                   |       | 30,000                     |       | CDN$5.93                |       | February 11, 2012        |       |
| Jerry Ormiston         |       | 10,000                     |       | CDN$3.66                |       | August 13, 2007          |       |
|                        |       | 15,000                     |       | CDN$2.32                |       | December 31, 2007        |       |
|                        |       | 15,000                     |       | CDN$5.73                |       | December 31, 2009        |       |
|                        |       | 15,000                     |       | CDN$5.05                |       | December 31, 2010        |       |
|                        |       | 15,000                     |       | CDN$5.62                |       | December 31, 2011        |       |
| **Total**              | ** ** | **1,195,000**              | **(1)**    |                    |       |                     |       |

----

(1)                                  Excludesshares held by Dr. Barkin, which are included in the total of shares held bydirectors.

 

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**Board Practices**

Statement of CorporateGovernance Practices

The Board of Directors of the Company believes that sound corporategovernance practices are essential to the well-being of the Company and itsshareholders, and that these practices should be reviewed regularly to ensurethat they are appropriate.  EffectiveJune 30, 2005, National Instrument 58-101 *Disclosure of Corporate Governance Practices* (“NI 58-101”)and National Policy 58-201 *CorporateGovernance Guidelines* (“NP 58-201”) were adopted in Canada.  NI 58-101 requires issuers todisclose the corporate governance practices that they have adopted.  NP 58-201 provides guidance oncorporate governance practices.  Inaddition, the Company is subject to Multilateral Instrument 52-110 *Audit Committees* (“MI 52-110”),which has been adopted in various Canadian provinces and territories and whichprescribes certain requirements in relation to audit committees.  The Board of Directors has carefullyconsidered and reviewed the series of guidelines for effective corporategovernance in NP 58-201, the corporate governance requirements of the U.S. *Sarbanes-Oxley Act of 2002*(the “SOXRequirements”), and the corporate governance reforms of The NASDAQ StockMarket, Inc. (the “NASDAQ Rules”).  TheBoard of Directors believes that the Company’s corporate governance practicessatisfy the recommendations and rules contained in these variousregulations.  The Company’s policies andpractices for corporate governance are set out below.

Mandate of the Board of Directors

The mandate of the Board of Directors is to supervise the management ofthe business and affairs of the Company. In light of that responsibility, the Board of Directors reviews,discusses and approves various matters related to the Company’s operations, strategicdirection and organizational structure, where required, and involves itselfjointly with management in ensuring the creation of shareholder value and inserving the best interests of the Company. In April 2004, the Board of Directors adopted a detailed Charter.  The Charter is available on the Company’swebsite at www.draxis.com.  The Charterspecifies that the Board of Directors is responsible for:

(i)                                     Adoptinga strategic planning process for the Company;

(ii)                                  Adoptinga communications policy for the Company;

(iii)                               Overseeing the financialintegrity of the Company;

(iv)                              Monitoringcompliance with the corporate objectives of the Company;

(v)                                 Approvingand ascertaining that the Company monitors adherence to its Code of Ethics andBusiness Conduct;

(vi)                              Appointingthe Chief Executive Officer (the “CEO”), monitoring his performance andascertaining that succession plans are in place with respect to the CEO andsenior management;

(vii)                           Ensuring that appropriatestructures and procedures are in place so that the Board of Directors canfunction independently from management;

(viii)                        Establishing performancemeasures for the Company and its management;

(ix)                                Monitoringcompliance with legal requirements and ascertaining that the Company hasprocedures concerning the proper preparation, approval and maintenance ofdocuments and records;

(x)                                   Approvingchanges in the By-laws and Articles of Incorporation and agendas forshareholder meetings;

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(xi)                                Approvingthe Company’s legal structure, name and logo; and

(xii)                             Performing such functionsas it reserves to itself or which cannot, by law, be delegated to Committees ofthe Board of Directors or to management.

There are no service contracts with the Boardmembers that provide for any benefits upon their termination as directors ofthe Company.

There are five regularly scheduled Board of Directors meetings peryear.  However, the Board of Directorsalso meets as frequently as the need arises to consider major issues andopportunities.

There were eight meetings of the Board of Directors in 2006.

PositionDescriptions

In April 2004, the Company adopted terms of reference for each of theNon Executive Chair of the Board of Directors, the Committee Chairs and the CEOsetting out the key responsibilities of each of these individuals.

The terms of reference for each of the Non Executive Chair of the Boardof Directors (the “Chair of the Board”) and the Committee Chairs provide thateach of these individuals is to be an independent director, has unfetteredtwo-way communication with all senior officers and reports to and maintainsopen communication with the CEO, in the case of the Chair of the Board, theChair of the Board, in the case of the Committee Chairs, as well as with theindependent auditor, in the case of the Chair of the Audit Committee.  The primary role of the Chair of the Boardand of the Committee Chairs includes ensuring that the Board of Directors orthe relevant Committee, as the case may be, functions properly, that it meetsits obligations and responsibilities, and that its organization and mechanismsare in place and are working effectively. A copy of the terms of reference of the NonExecutive Chair is filed as Exhibit 4.59 and a copy of the terms ofreference of the Committee Chairs is filed as Exhibit 4.60 to this AnnualReport (Form 20-F).

The terms of reference for the CEO provide that the CEO reports to andmaintains open communication with the Chair of the Board.  The terms of reference for the CEO providethat the CEO is to provide overall leadership and vision in developing, inconcert with the Board of Directors, the strategic direction of the Company,and in developing the strategies and business plans necessary to realisecorporate objectives.  They also providethat it is the CEO’s responsibility to manage the overall business of theCompany to ensure strategic and business plans are effectively implemented, theresults are monitored and reported to the Board of Directors, and financial andoperational objectives are attained.  A copy of theterms of reference for the CEO is filed as Exhibit 4.61 to this AnnualReport (Form 20-F).

Compositionof the Board of Directors

The Board of Directors has reviewed its composition to determine whichof the directors may be considered “independent” in conformity with applicableCanadian, TSX, U.S. and NASDAQ requirements. Generally, a director who does not have any direct or indirect “materialrelationship” with the Company is considered independent.  A “material relationship” is a relationshipwhich could, in the view of the Board of Directors, be reasonably expected tointerfere with the exercise of a member’s independent judgment.

The Board of Directors, currently composed of eight members, hasconsidered the relationship of each of the directors to the Company and hasdetermined that six of the eight directors are independent.  

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Messrs.Darnell, Henel, King, Sarick, Simpson and Vivash are considered to beindependent directors.  Dr. MartinBarkin, President and Chief Executive Officer of the Company, is not consideredto be an independent director since he is an employee of the Company.  Mr. Leslie Dan is not considered to be anindependent director because he was an executive officer of Viventia BiotechInc. at a time when Dr. Barkin, currently an executive officer of the Company,was a member of the Compensation Committee of that corporation.  In accordance with the provisions ofMultilateral Instrument 52-110, Mr. Dan will be deemed to be a non-independentdirector until December 30, 2008.

The Board of Directors believes that Dr. Barkin is sensitive toconflicts of interest and excuses himself from deliberations and voting inappropriate circumstances.  He brings askill set and knowledge base which is beneficial to the Company and hisparticipation as a director contributes to the effectiveness of the Board ofDirectors.  In addition, when itdetermines that it would be appropriate to do so, the Board of Directors setsaside, during its regularly scheduled meetings, time for meeting without anymember of management (including the Chief Executive Officer) or anynon-independent directors present. Since January 1, 2006, 6 meetings have beenso held.

The Board of Directors has adopted a practice that the Chairman of theBoard of Directors and the Chief Executive Officer of the Company are separateindividuals.  Mr. Brian King, theChairman of the Board of Directors, is an independent director.  The Chairman provides leadership to the Boardof Directors with respect to its functions as described in the Board of Directors’mandate and oversees the logistics of the operations of the Board of Directors.

The Board of Directors requires that any director recuse himself fromany decision to be made in any transaction in which the director has a materialinterest.

Directors are elected to a renewable one year term.

Committeesof the Board of Directors

The Board of Directors has three standing committees:  the Audit Committee, the Human Resources andCompensation Committee and the Nominating and Corporate Governance Committee.  To maintain appropriate independence, nomembers of management sit on any of the three standing committees.

From time to time, special committees of the Board of Directors areappointed to consider special issues, in particular, any issues which could potentiallyinvolve related party transactions.

Committees of the Board of Directors and individual Board members mayengage independent consultants and outside advisors at the expense of theCompany, where reasonable and appropriate, to assist them in discharging theirresponsibilities.

*Audit Committee*

The Audit Committee is responsible for reviewing the Company’s financialreporting procedures and internal controls. The Committee is also responsible for reviewing quarterly financialstatements and the annual financial statements and earnings announcements priorto their approval by the full Board of Directors and communicating regularlywith the Company’s external auditors.

The Company believes the oversight responsibility of the Committeeprovides a key stewardship role for the Committee in the Company’s financialdisclosure issues, internal controls, risk management, corporate finance andrelated matters.

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In reviewing the audited financial statements of the Company, theCommittee discusses the quality, not just the acceptability, of the accountingprinciples, the reasonableness of significant judgments, and the clarity ofdisclosure in the financial statements. In addition, the Committee discusses with the Company’s IndependentRegistered Chartered Accountants the overall scope and plans for theiraudit.  The Committee meets with theIndependent Registered Chartered Accountants, with and without managementpresent, to discuss the results of their examination and the overall quality ofthe Company’s financial reporting.  TheCommittee also carefully reviews evolving Canadian and U.S. audit committeeregulations and best practices to ensure corporate alignment with the spiritand intent of such regulations and practices.

In February 2007, May 2005, February 2005 and April 2004, the Board ofDirectors approved amendments to the Charter for the Audit Committee, which wasinitially approved in February 2003.  TheCharter is available on the Company’s website at www.draxis.com. A copy of theamended Charter is filed as Exhibit 4.62 to this Annual Report (Form20-F). The Charter specifies that the purpose of the Committee is to assist theBoard of Directors with its oversight responsibilities by:

·                  Reviewing theintegrity of the consolidated financial statements of the Company;

·                  Recommending tothe Board of Directors the appointment of the Independent Registered CharteredAccountants and reviewing the Independent Registered Chartered Accountants’qualifications and independence;

·                  Reviewing theperformance of the Company’s Independent Registered Chartered Accountants;

·                  Reviewing thetimely compliance by the Company with all legal and regulatory requirements foraudit and related financial functions of the Company;

·                  Reviewingfinancial information contained in public filings of the Company prior tofiling;

·                  Reviewingearnings announcements of the Company prior to release to the public and anyother press release containing financial information;

·                  Overseeing theCompany’s systems of and compliance with internal financial controls andmanagement’s reporting on internal controls and risk management;

·                  Reviewing theCompany’s auditing, accounting and financial reporting processes; and

·                  Dealingwith all complaints regarding accounting controls and auditing matters.

In accordancewith the Audit Committee Charter, the Audit Committee pre-approves all auditingservices and permitted non-audit services (including fees and terms thereof) to be performed for theCompany or its subsidiaries by its Independent Registered CharteredAccountants.

In May 2003, the Audit Committee also established “whistleblowing”procedures for the confidential submission of concerns by employees of the Corporation or any of its subsidiaries about accounting,internal controls or auditing issues.

Composition of theAudit Committee

The Committee is currently composed of four directors, all of whom areindependent directors and all of whom are financially literate.  The members of the Audit Committee areMessrs. Samuel Sarick (Chairman), Bruce Simpson, George Darnell and RolfHenel.  Mr. Henel is the Company’sdesignated financial expert in accordance with applicable regulatory andlegislative requirements.  Thedesignation of Mr. Henel as an Audit Committee financial expert does not makeMr. Henel an “expert” for any other purpose, impose any duties, obligations orliability on Mr. Henel that are greater than those imposed on members of theAudit Committee and Board of Directors who do not carry his designation, oraffect the duties, obligations or liability of any other member of the AuditCommittee.

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Relevant Educationand Experience

All of the members of the Audit Committee are financially literate.  Each of the Audit Committee members (i) hasan understanding of the accounting principles used by the issuer to prepare itsfinancial statement, (ii) the ability to assess the general application of suchaccounting principles in connection with the accounting for estimates, accrualsand reserves; (iii) has practical experience in preparing, auditing, analyzingor evaluating financial statements, and (iv) has an understanding of internalcontrols and procedures for financial reporting.

In determining whether a director: (i) is “financially literate”, theBoard of Directors considers whether the director has the ability to read andunderstand a balance sheet, an income statement, a cash flow statement and thenotes attached thereto; and (ii) has “accounting or related financialexperience”, the Board of Directors considers whether the director has theability to analyze and interpret a full set of financial statements, includingthe notes attached thereto.

Mr. Samuel Sarick has over 50 years of experience as President and CEOof a major real estate corporation.

Mr. Bruce Simpson has an MBA degree and has served as President of theGenpharm division of E Merck and President and Chief Executive Officer ofMedeva Pharmaceuticals in the United States.

Mr. George Darnell has an MBA degree and is the retired President of theDade Division and Executive Vice President of the Baxter Diagnostics Group ofBaxter International.

Mr. Rolf Henel has an MBA degree in Finance and Accounting and was atreasurer and then President of Cyanamid International, Lederle Division.

*Human Resources and Compensation Committee*

The Human Resources and Compensation Committee oversees overallcorporate policy with respect to compensation and benefits and makesrecommendations to the Board of Directors on, among other things, thecompensation of senior management.  Inassessing compensation issues, the Committee reviews and examines in detail theperformance of senior management.

Each of the three current members of the Committee is an independentdirector.  The members of the HumanResources and Compensation Committee are Messrs. Brian King (Chairman), BruceSimpson and John Vivash.

In May 2005, the Board of Directors approved amendments to the Charterfor the Human Resources and Compensation Committee, which was initiallyapproved in April 2004.  The Charter isavailable on the Company’s website at www.draxis.com.  The Charter specifies that the purpose of theCommittee is to assist the Board of Directors with its oversightresponsibilities by reviewing and reporting on:

·                  Management’ssuccession plans for executive officers, with special emphasis on CEOsuccession, and including specific development plans and career planning forpotential successors;

·                  Compensationphilosophy of the organization, including a compensation strategy andcompensation policies for executive officers, as proposed by the CEO;

·                  Recommendationsto the Board of Directors for the appointment of the CEO and other executiveofficers, corporate objectives that the CEO and such other executive officers,as the case may be, 

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                        areresponsible for meeting, assessment of the CEO against these objectives,monitoring of the CEO’s performance, and providing advice and counsel in theexecution of his duties;

·                  Totalcompensation plans including adequacy and form of compensation realisticallyreflecting the responsibilities and risks of the position for the CEO of theCompany and, in connection therewith, consider appropriate information,including information from the Board of Directors with respect to the overallperformance of the CEO;

·                  Compensation forexecutive officers, annual adjustment to executive officer salaries, and thedesign and administration of short and long-term incentive plans, stockoptions, benefits and perquisites as proposed by the CEO;

·                  Employment andtermination arrangements for executive officers;

·                  Adoption of newor significant modifications to pay and benefit plans;

·                  Significantchanges to the Company’s organizational structure relating to human resourcesfunction;

·                  The Committee’sproposed executive compensation report to be contained in the Company’s annualManagement Proxy Circular;

·                  Managementdevelopment programs for the Company;

·                  Any specialemployment contracts or arrangements with executive officers of the Companyincluding any contracts relating to a change of control;

·                  Remuneration formembers of the Board of Directors and Committees thereof, including adequacyand form of compensation realistically reflecting the responsibilities andrisks of the positions and recommending changes where applicable;

·                  Compliance bythe Company and its subsidiaries with all applicable employment and laborlegislation; and

·                  Theperformance of the Committee and the effectiveness of the Committee’s members.

There is currently no set date for the retirement of the existing CEO.

*Nominating and Corporate Governance Committee*

The Nominating and Corporate Governance Committee is responsible forrecommending annually the members of the Board of Directors proposed forelection to the Board of Directors, recommending new candidates for Board ofDirectors membership, monitoring the composition and the Board of Directors andsuggesting appropriate changes.  It seekson behalf of shareholders well-qualified candidates to nominate as directors(individuals who provide a balance in terms of their backgrounds and experiencein different industries and professions). It is also responsible for making recommendations to the full Board ofDirectors with respect to developments in the area of corporate governance andbest practices.

Each of the three current members of the Committee is an independentdirector.  The members of the Nominatingand Corporate Governance Committee are Messrs. John Vivash (Chairman), GeorgeDarnell and Rolf Henel.

In May 2005, the Board of Directors approved amendments to the Charterfor the Nominating and Corporate Governance Committee, which was initiallyapproved in April 2004.  The Charter isavailable on the Company’s website at www.draxis.com.  The Charter specifies that the purpose of theCommittee is to assist the Board of Directors with its oversight responsibilitiesby:

·                  Establishing apolicy and procedure for identifying and selecting potential nominees for theBoard of Directors, including considering the competencies and skills that theBoard of Directors should possess and the competencies and skills of eachexisting and potential director;

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·                  Monitoring Boardof Directors size and composition and suggesting changes in this respect whereappropriate;

·                  Recommendingannually members for election to the Board of Directors;

·                  Identifying andrecommending new candidates for Board of Directors membership;

·                  Developing theCompany’s approach to governance issues and making recommendations to the Boardof Directors in the area of corporate governance practices of the Board ofDirectors;

·                  Preparing andreviewing with the Board of Directors an annual performance evaluation of theeffectiveness of individual Board members and the Board of Directors and itsCommittees.  The assessment of the Boardof Directors examines its effectiveness as a whole and specifically reviewsareas that the Board of Directors and/or management believe could be improvedto ensure the continued effectiveness of the Board of Directors in theexecution of its responsibilities;

·                  Developing andrecommending to the Board of Directors standards to be applied to assessmaterial relationships between the Company and its Directors in accordance withconflict of interest standards;

·                  Reviewingannually the risks identified by the Audit Committee with respect to the riskmanagement policies and procedures of the Company and to ensure such risks areappropriately identified in the Company’s public disclosure documentation;

·                  Revising, asappropriate, in accordance with best practices and legal requirements, the Codeof Ethics and Business Conduct for directors, officers and employees, as wellas the Disclosure and Insider Trading Policy for the Company to address, amongother things, procedures to monitor insider trading activities, to preventselective disclosure and to mandate trading blackouts and corporate quietperiods;

·                  Monitoringcompliance with any Board of Directors mandated Director minimum shareholdingrequirements and monitoring attendance by Directors at Board of Directors andCommittee meetings;

·                  Reviewing theCharter periodically and recommending any changes required to its scope andcontent to the Board of Directors; and

·                  Carryingout any other duties or responsibilities expressly delegated to the Committeeby the Board of Directors.

*Special Committee*

Asstated above, from time to time, special committees of the Board of Directorsare appointed to consider special issues. On May 10, 2006, the Board constituted a Special Committee comprised ofMr. Brian King, Mr. Sam Sarick and Mr. John Vivash, each an independent director,in order to determine the long term strategy of the Company and theopportunities available to it and its subsidiaries for long term growth.  This Committee is currently inactive.

DecisionsRequiring Approval by the Board of Directors

In addition to those matters that must, by law, be approved by the Boardof Directors, certain other significant matters relating to the business andaffairs of the Company require prior approval of the Board of Directors.  These matters include:

(i)                                     theapproval of the quarterly and annual financial statements and earningsannouncements;

(ii)                                  theapproval of management’s discussion and analysis of financial results;

(iii)                               theapproval of the Company’s strategic business plans and directions;

(iv)                              anyrelated party transaction or any transaction involving any officer or director,regardless of materiality; and

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(v)                                 anydisposition or expenditure in excess of CDN$1,000,000.

Orientationof New Directors and Continuing Education

In orienting new members to the Board ofDirectors, members are provided with an opportunity to visit the Company’sfacilities and to meet with management and other members of the Board ofDirectors to discuss and understand the Company’s business.  With respect to continuing education of theDirectors, detailed documentation and presentations are regularly provided toDirectors relating to the current business plan and current policies of theCompany as well as ongoing developments in the industry areas in which theCompany operates as well as legislative changes affecting the Company.  All of the Company’s executives are availablefor discussions with Directors concerning any questions or comments which mayarise between meetings.

Performanceof the Board of Directors

The Board of Directors regularly considers and assesses its performancerelating to its effectiveness, size, compensation policies and assessment ofmanagement performance.  In this regard,in December 2006, the Directors completed a Board Effectiveness Survey preparedby the Nominating and Corporate Governance Committee in which they gaveassessments on issues related to Board of Directors responsibility, operationsand effectiveness.  The results of thissurvey were forwarded to the Chairman of the Nominating and CorporateGovernance Committee, who shared the results with all of the Boardmembers.  In December 2006, Directorsalso completed a Board Evaluation Survey prepared by the Nominating andCorporate Governance Committee whereby each director assessed the performanceof each other director of the Board of Directors.  The Chairman of the Nominating and CorporateGovernance Committee advised each director of the assessment so received andforwarded a copy of each of the assessments to the Chairman of the Board.

CEOPerformance

On an annual basis, the Company’s President and CEO circulates proposedoperating and strategic plans which are discussed and, if appropriate, adoptedby the Board of Directors.  The Board ofDirectors met in December 2006 to review the Company’s one year operating planand three year strategic plan.  Thesestrategic plans form the basis of the corporate objectives which the CEO isresponsible for meeting.  The HumanResources and Compensation Committee of the Board of Directors assesses the CEO’sperformance against the goals established and agreed to and recommends hiscompensation to the Board of Directors as a whole.

ShareholderFeedback and Communication

The Company maintains an investor relations department headed by anExecutive Director, Investor Relations, which reports directly to the Presidentand CEO of the Company.  In addition,investor relations experts are retained from time to time by the Company toadvise on issues and best practices for investor relations.  The Company communicates regularly with itsshareholders through annual and quarterly reports.  At the Company’s annual general meeting ofshareholders, a full opportunity is afforded for shareholders to ask questionsconcerning the Company’s business.  Eachshareholder and investor inquiry receives a prompt response from the investorrelations department or an appropriate officer of the Company.  Information about the Company, includingannual reports, interim financial reports and recent news releases, are alsoavailable on the Company’s website at www.draxis.com.  In addition, the Company provides theopportunity for investors in both Canada and the U.S. to pose questions tosenior management, including the CEO, the Chief Operating Officer, the ChiefFinancial 

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Officerand the Executive Director, Investor Relations through public forums such asconference calls and webcasts.

Boardof Directors’ Expectations of Management

Management is responsible for the day-to-day operations of the Companyand is expected to implement the approved operating and strategic businessplans within the context of authorized budgets and corporate policies andprocedures.  The information whichmanagement provides to the Board of Directors is critical.  Management is expected to report regularly tothe Board of Directors in a comprehensive, accurate and timely fashion on thebusiness and affairs of the Company and any legislative changes which affectthe Company.  The Board of Directorsmonitors the nature of the information requested by and provided to it so thatit can effectively identify issues and opportunities for the Company.

**Employees**

As at December 31, 2006, the Company and its subsidiaries employed atotal of 504 employees.  The DRAXISPharma division is the largest employer with 404 employees, all located inKirkland, Québec.  The DRAXIMAGE divisionemploys 87 people all in Kirkland, Québec. The Company itself employs 13 people, the majority of whom are locatedin Kirkland, Québec.  At December 31,2005 and 2004, the Company and its subsidiaries had 492 and 495 employees, respectively.

**Item 7.    Major Shareholders and Related PartyTransactions**

The Company is not aware of any company, foreign government or naturalor legal person that owns or controls the Company, directly or indirectly.

To the knowledge of the directors and officers of the Company as ofDecember 31, 2006, the following are the only persons who, as at the datesmentioned below, beneficially own, directly or indirectly, or exercise controlover our common shares carrying more than five percent (5%) of the votes attachedto all of those shares.
| Identity of Person or Group        | ** ** | **Amount Owned**        | ** ** | **Percent of Class** |
|------------------------------------|------------|-------------------------|------------|----------------------|
| Natcan Investment Management  Inc. |       | 3,712,702 common shares |       | 8.9%                 |
| Neil Gagnon                        |       | 2,923,332 common shares |       | 7.0%                 |
| Mackenzie Financial  Corporation   |       | 4,511,900 common shares |       | 10.9%                |
| Beutel, Goodman  & Company Ltd |       | 3,419,033               |       | 8.2%                 |

 

Based on the Schedule 13G public filings and Early Warning Reports underNational Instrument 62-103 in Canada made by Natcan Investment Management Inc.during 2005 and 2006, the percentage of our common stock beneficially owned byNatcan Investment Management Inc. decreased from 9.6% as at December 31, 2005to 8.9% as at December 31, 2006.

Based on the Schedule 13G public filings made by Neil Gagnon during 2005and 2006, the percentage of our common stock beneficially owned by Neil Gagnondecreased from 7.8% in 2005 to 7.0% as at December 31, 2006.

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Based on the Schedule 13G public filings made by Mackenzie FinancialCorporation during 2005 and 2006, the percentage of our common stock owned byMackenzie Financial Corporation increased from 6.5% as at December 31, 2005 to10.9% as at December 31, 2006.

To the knowledge of the Company, the Schedule 13G public filing made byBeutel, Goodman & Company Ltd, on June 2, 2006, indicates that they held8.2% of shares of the Company as of December 31, 2005.  The Company is unable to determine from thepublic filings as of the date of this Annual Report on Form 20-F what theshareholdings of Beutel, Goodman & Company Ltd were as at December 31,2006.

To our knowledge, as of March 19, 2007, 19,355,486 common shares (46.2% ofthe outstanding common shares at that date) were held of record by 494shareholders whose registered addresses were in the United States.  The Company has no knowledge of any othershares held beneficially in the United States.

As of March 19, 2007, to our knowledge there were a total of 995shareholders of record holding 41,895,473 common shares issued and outstanding.

To our knowledge, there are no arrangements, the operation of which may,at a subsequent date, result in a change in control.

The building housing our head office premises at 6870 Goreway Drive inMississauga, Ontario is owned 50% by Samuel Sarick Limited, a corporationwholly owned by Mr. Sarick, a director of the Company.  The original lease for the premises wasentered into on April 25, 1994 between Samuel Sarick Limited, KentlakeConstruction Limited and Anec Investments Limited, as landlord, and theCompany, as tenant.  The lease renewalwas negotiated between the Company and Samuel Sarick Limited on an arm’s-lengthbasis with the assistance of Colliers International retained by the Company andwas renewed with the approval of the Board of Directors effective May 1, 1999for a period of five years and renewed again on April 26, 2004 for a period oftwo years, which expired on May 31, 2006. The Company is now leasing the premises on a month to month basis on thesame terms and conditions as the ones which expired on May 31, 2006.  The Company believes that the lease terms areconsistent with arm’s length comparables and that the annual rent payable ofCDN$144,370 is at fair market value.

The Company has, in the past, made loans to certain key managementpersonnel in connection with its incentive plans and as inducements to enter into employment agreements.  These plans have been discontinued, and therewill be no further indebtedness under said plans.  All outstanding loans were repaid in May 2005.

**Item 8.    Financial Information**

The Company’s ConsolidatedFinancial Statements are attached as pages F-1 through F-26.  There have been no significant changes sincethe date of the financial statements.

**Legal/Arbitration Proceedings**

Fromtime to time, the Company becomes involved in legal proceedings and claimswhich arise in the ordinary course of business. With the exceptionof the matters described below, the Company considers that the ultimateliability with respect to any known actions will not materially affect thebusiness, financial position, results of operations or cash flows of theCompany.

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In 1998, a Canadian legal proceeding was launched against us and oursubsidiary DAHI by a former consultant, Jozsef Knoll, claiming royaltyentitlements based on the net profit from sales of *ANIPRYL*®.  Total damages claimed are $100 million,including a claim to certain shares of DAHI. However, the plaintiff has taken no steps in the last seven years tomove the claim forward. While we believe that we have good defenses to the Knoll proceeding,this dispute may not be resolved in our favor, if it is pursued.  It is possible that a court or arbitrationtribunal may find us to be in breach of certain agreements, or infringingvalidly issued patents of third parties or practicing the intellectual propertyof others.  In that event, in addition tothe cost of defending the underlying proceeding, we may have to pay licensefees, additional royalties and/or damages and may be ordered to assign certain *ANIPRYL®-*related patents and be prohibitedfrom conducting certain activities. Under such circumstances, we could incur substantial loss and ourbusiness could be negatively affected.

On July 22, 2005, we announced that, together withother defendants, we had received a Statement of Claim filed before theSuperior Court of Justice of Ontario alleging that PermaxÒ, a drug that wedistributed in Canada for a third party manufacturer prior to July 2003, causes“compulsive/obsessive behaviour, including pathological gambling”.  The plaintiff is seeking to have this actioncertified as a class action.  We believethis claim against us is without merit and we intend to vigorously defend this proceeding and any motion forcertification.  Prior to July 2003,PermaxÒ was distributed in Canadaby DRAXIS Pharmaceutica, our Canadian pharmaceutical sales and marketingdivision.  In July 2003, we sold theDRAXIS Pharmaceutica division to Shire. As of December 31, 2006, there have been no developments in this action.

**Item 9.    The Offer and Listing**

The Company’s common shares are listed on The Toronto Stock Exchange(the “TSX”) under the symbol “DAX” and the NASDAQ National Market System (“NASDAQ”)in the United States under the symbol “DRAX”.

The following table sets forth, in Canadian dollars, the per share highand low sales prices on the TSX for the five most recent full financial years:

| Years | ** ** | **High  ($)** | ** ** | **Low  ($)** | ** ** |
|-------|------------|---------------|------------|--------------|------------|
| 2002  |       | 5.60          |       | 2.00         |       |
| 2003  |       | 4.75          |       | 1.61         |       |
| 2004  |       | 7.90          |       | 4.12         |       |
| 2005  |       | 7.05          |       | 4.61         |       |
| 2006  |       | 5.80          |       | 4.32         |       |

 

The following table sets forth, in Canadian dollars, the per share highand low sales prices on the TSX by fiscal quarter for 2006 and 2005.

| **2006**       | ** ** | **High  ($)** | ** ** | **Low  ($)** | ** ** |
|----------------|------------|---------------|------------|--------------|------------|
| First Quarter  |       | 5.60          |       | 5.00         |       |
| Second Quarter |       | 5.44          |       | 4.32         |       |
| Third Quarter  |       | 5.37          |       | 4.71         |       |
| Fourth Quarter |       | 5.80          |       | 4.95         |       |

 

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| **2005**       | ** ** | **High  ($)** | ** ** | **Low  ($)** | ** ** |
|----------------|------------|---------------|------------|--------------|------------|
| First Quarter  |       | 6.57          |       | 4.75         |       |
| Second Quarter |       | 7.05          |       | 5.65         |       |
| Third Quarter  |       | 6.92          |       | 5.27         |       |
| Fourth Quarter |       | 6.03          |       | 4.61         |       |

 

The following table sets forth, in Canadiandollars, the per share high and low sales prices and the trading volumes on theTSX from January 2006 to February 2007:
| **Months**     | ** ** | **High  ($)** | ** ** | **Low  ($)** | ** ** | **Trading Volumes  (#)** | ** ** |
|----------------|------------|---------------|------------|--------------|------------|-------------------------------|------------|
| January 2006   |       | 5.50          |       | 5.00         |       | 789,146                       |       |
| February 2006  |       | 5.56          |       | 5.10         |       | 1,176,687                     |       |
| March 2006     |       | 5.60          |       | 5.16         |       | 1,533,200                     |       |
| April 2006     |       | 5.44          |       | 4.72         |       | 768,100                       |       |
| May 2006       |       | 5.02          |       | 4.35         |       | 821,500                       |       |
| June 2006      |       | 5.06          |       | 4.32         |       | 438,900                       |       |
| July 2006      |       | 5.12          |       | 4.71         |       | 432,200                       |       |
| August 2006    |       | 5.37          |       | 4.80         |       | 358,500                       |       |
| September 2006 |       | 5.13          |       | 4.72         |       | 295,300                       |       |
| October 2006   |       | 5.40          |       | 4.95         |       | 1,592,000                     |       |
| November 2006  |       | 5.80          |       | 4.98         |       | 851,400                       |       |
| December 2006  |       | 5.64          |       | 5.15         |       | 865,900                       |       |
| January 2007   |       | 6.15          |       | 5.36         |       | 1,536,500                     |       |
| February 2007  |       | 6.35          |       | 5.81         |       | 2,357,200                     |       |

 

The following table sets forth, in U.S. dollars,the per share high bid and low asked prices on NASDAQ for the five most recentfull financial years:

| Years | ** ** | **High  ($)** | ** ** | **Low  ($)** | ** ** |
|-------|------------|---------------|------------|--------------|------------|
| 2002  |       | 3.67          |       | 1.29         |       |
| 2003  |       | 3.70          |       | 1.09         |       |
| 2004  |       | 5.94          |       | 3.29         |       |
| 2005  |       | 5.84          |       | 3.93         |       |
| 2006  |       | 5.08          |       | 3.90         |       |

 

The following table sets forth, in U.S. dollars,the per share high and low asked prices on NASDAQ in U.S. dollars, by fiscalquarter for 2006 and 2005:

| 2006           | ** ** | **High  ($)** | ** ** | **Low  ($)** | ** ** |
|----------------|------------|---------------|------------|--------------|------------|
| First Quarter  |       | 4.85          |       | 4.27         |       |
| Second Quarter |       | 4.55          |       | 3.90         |       |
| Third Quarter  |       | 4.75          |       | 3.96         |       |
| Fourth Quarter |       | 5.08          |       | 4.31         |       |

 

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| 2005            | ** ** | **High ($)** | ** ** | **Low ($)** | ** ** |
|-----------------|------------|--------------|------------|-------------|------------|
| First  Quarter  |       | 5.45         |       | 3.95        |       |
| Second  Quarter |       | 5.84         |       | 4.51        |       |
| Third  Quarter  |       | 5.74         |       | 4.50        |       |
| Fourth Quarter  |       | 5.07         |       | 3.93        |       |

 

                The following table sets forth, in U.S. dollars, theper share high and low sales prices and the trading volumes on NASDAQ fromJanuary 2006 to February 2007:

 

| Months         | ** ** | **High  ($)** | ** ** | **Low  ($)** | ** ** | **Trading Volumes  (#)** | ** ** |
|----------------|------------|---------------|------------|--------------|------------|-------------------------------|------------|
| January 2006   |       | 4.63          |       | 4.27         |       | 942,602                       |       |
| February 2006  |       | 4.85          |       | 4.35         |       | 860,161                       |       |
| March 2006     |       | 4.79          |       | 4.40         |       | 789,700                       |       |
| April 2006     |       | 4.53          |       | 4.14         |       | 824,400                       |       |
| May 2006       |       | 4.55          |       | 3.90         |       | 641,000                       |       |
| June 2006      |       | 4.53          |       | 3.91         |       | 826,000                       |       |
| July 2006      |       | 4.50          |       | 4.12         |       | 524,000                       |       |
| August 2006    |       | 4.75          |       | 4.30         |       | 455,500                       |       |
| September 2006 |       | 4.55          |       | 3.96         |       | 343,700                       |       |
| October 2006   |       | 4.71          |       | 4.35         |       | 533,000                       |       |
| November 2006  |       | 5.08          |       | 4.31         |       | 1,065,400                     |       |
| December 2006  |       | 5.03          |       | 4.95         |       | 1,140,000                     |       |
| January 2007   |       | 5.26          |       | 4.56         |       | 1,579,800                     |       |
| February 2007  |       | 5.51          |       | 4.91         |       | 3,826,900                     |       |

 

                The transfer agentof the Company is Computershare Investor Services Inc., Stock TransferServices, located at 100 University Avenue, Toronto, Ontario, Canada  M5J 2Y1

 

**Item10.                Additional Information**

 

**Bylawsand Articles of Amalgamation**

                The Company’s Articles ofAmalgamation are on file with the Corporations Directorate of Industry Canadaunder Corporation Number 357288-9.  TheArticles of Amalgamation do not include a stated purpose and do not place anyrestrictions on the business that the Company may carry on.

**Inspection Rights of Shareholders**

                Under the *Canada Business Corporations Act* (the “CBCA”or the “Act”), shareholders are entitled to be provided with a copy of the listof registered shareholders of the company. In order to obtain the shareholder list, the Company must be providedwith an affidavit including, among other things, a statement that the list willonly be used for the purposes permitted by the CBCA.  These permitted purposes include an effort toinfluence of the voting of shareholders of the Company, an offer to acquiresecurities of the Company and any other matter relating to the affairs of the Company.  The Company is entitled to charge areasonable fee for the provision of the shareholder list and must deliver thatlist no more than ten days after receipt of the affidavit described above.

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                Shareholders of the Company havethe right to inspect certain corporate records, including its articles andby-laws and minutes of meetings and resolutions of the shareholders.  Shareholders have no statutory right toinspect minutes of meetings and resolutions of directors of the Company.

                Shareholders of the Company havethe right to certain financial information respecting the Company.  In addition to the annual and quarterlyfinancial statement required to be filed under applicable securities laws, theCompany is required to place before every annual meeting of shareholders itsaudited comparative annual financial statements.  In addition, shareholders have the right toexamine the financial statements of each of its subsidiaries and any othercorporate entity whose accounts are consolidated in the financial statements ofthe Company.

**Directors**

                The minimum number of directorsof the Company is one (1) and the maximum number is twelve (12).  In accordance with the Company’s bylaws andthe Act, a majority of its directors must be residents of Canada.  In order to serve as a director, a personmust be a natural person at least 18 years of age, of sound mind and notbankrupt.  Neither the Articles ofAmalgamation, bylaws, nor the Act, impose any mandatory retirement requirementsfor directors.

                Under the Company’s bylaws andthe Articles of Amalgamation, a director of the Company need not be ashareholder.  However, in June 2001 theBoard of Directors established a corporate policy requiring each currentDirector to acquire by June 2004 (or in the case of future Board of Directorsmembers, within three years of their appointment) common shares in the Companyequal to five times his or her annual honorarium.  All directors who were to comply with thisrequirement by June 2004 were in compliance as of said date.  In February 2005, the Board of Directorsadopted a resolution amending this policy to fix the number of common shares tobe so held at 15,000.  Compliance withthis policy is monitored annually by the Nominating and Corporate GovernanceCommittee.

                A director who is a party to, orwho is a director or officer of, or has a material interest in, any person whois a party to a material contract or transaction or proposed material contractor transaction with the Company must disclose to the Company the nature andextent of his or her interest at the time and in the manner provided by theAct.  The Act prohibits such a directorfrom voting on any resolution to approve the contract or transaction unless thecontract or transaction:

·                                          relates primarily to his or her remuneration asa director, officer, employee or agent of the Company or an affiliate;

·                                          is for indemnity or insurance for director’sliability as permitted by the Act; or

·                                          is with an affiliate of the Company.

                The Board of Directors may, onbehalf of the Company and without authorization of its shareholders:

·                                          borrow money upon the credit of the Company;

·                                          issue, reissue, sell or pledge debt obligationsof the Company;

·                                          give a guarantee on behalf of the Company tosecure performance of an obligation of any person; and

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·                                          mortgage, hypothecate, pledge or otherwisecreate a security interest in all or any property of the Company, owned orsubsequently acquired, to secure any obligation of the Company.

                The Act prohibits the giving ofa guarantee to any shareholder, director, officer or employee of the Company orof an affiliated corporation or to an associate of any such person for anypurpose or to any person for the purpose of or in connection with a purchase ofa share issued or to be issued by the Company or its affiliates, where thereare reasonable grounds for believing that the Company is or, after giving theguarantee, would be unable to pay its liabilities as they become due, or therealizable value of the Company’s assets in the form of assets pledged orencumbered to secure a guarantee, after giving the guarantee, would be lessthan the aggregate of the Company’s liabilities and stated capital of allclasses.

                These borrowing powers may bevaried by the Company’s bylaws or its Articles of Amalgamation.  However, the Company’s bylaws and Articles ofAmalgamation do not contain any restrictions on or variations of theseborrowing powers.

                The general duties of a directoror officer of the Company under the CBCA are to act honestly and in good faithwith a view to the best interests of the Company and to exercise the care,diligence and skill that a reasonably prudent person would exercise incomparable circumstances.  Any breach ofthese duties may lead to liability to the Company and its shareholders forbreach of fiduciary duty.  In addition, abreach of certain provisions of the CBCA, including the improper payment ofdividends or the improper purchase or redemption of shares, will render thedirectors who authorized such action liable to account to the Company for anyamounts improperly paid or distributed.

**ShareCapitalization**

                The Company’s Articles ofAmalgamation authorize the issuance of an unlimited number of common shares(41,895,473 of which are outstanding as of March 19, 2007), an unlimited numberof preferred shares (none of which are issued and outstanding), and 2,000,000Employee Participation Shares (2,000,000 of which have been issued and none ofwhich remain outstanding as of March 19, 2007). The Articles of Amalgamation do not authorize the issuance of any otherclass of shares.

CommonShares

                The holders of the common sharesof the Company are entitled to receive notice of and to attend all meetings ofthe shareholders of the Company and have one vote for each common share held atall meetings of shareholders.  Thedirectors are elected at each annual meeting of shareholders and do not standfor re-election at staggered intervals.

                The holders of common shares areentitled to receive dividends and the Company will pay dividends, as and whendeclared by the Board of Directors, out of moneys properly applicable to thepayment of dividends, in such amount and in such form as the Board of Directorsmay from time to time determine, subject to the rights of the holders of anyother class of shares of the Company entitled to receive dividends in priorityto or ratably with the holders of the common shares, and all dividends whichthe Board of Directors may declare on the common shares shall be declared andpaid in equal amounts per share on all common shares at the time outstanding.

                In the event of the dissolution,liquidation or winding-up of the Company, whether voluntary or involuntary, orany other distribution of assets of the Company among its shareholders for thepurpose of winding-up its affairs, the holders of the common shares shall,subject to the rights of the holders of any 

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otherclass or shares of the Company entitled to receive the assets of the Companyupon such distribution in priority to or ratably with the holders of the commonshares, be entitled to participate ratably in any distribution of the assets ofthe Company.

PreferredShares

                The preferred shares of theCompany may at any time or from time to time be issued in one or moreseries.  No preferred shares of theCompany have been issued to date. Preferred shares shall be entitled to preference over the common sharesand any other shares of the Company ranking junior to the preferred shares andthe distribution of assets in the event of any liquidation and common dissolutionor winding-up of the Company, whether voluntary or involuntary, or otherdistribution of the assets of the Company among its shareholders for thepurpose of winding-up its affairs.  Thepreferred shares of each series shall rank in parity with the preferred sharesof every other series with respect to priority in the payment of dividends andin the distribution of assets in the event of liquidation, dissolution orwinding-up of the Company.

                Subject to the provisionsrelating to any particular series, the Company may redeem the whole or any partof the preferred shares on any one or more series outstanding from time to timeat such price or prices as may be applicable to such series by giving at leastthirty (30) days’ prior notice in writing of the intention of the Company toredeem such shares to each person who at the date of giving such notice is theregistered holder of preferred shares to be redeemed.

                The preferred shares may beissued on the authorization of the directors, without further authorization bythe shareholders, but the issuance of any preferred share is subject to thegeneral duties of the directors under the CBCA to act honestly and in goodfaith with a view to the best interests of the Company and to exercise thecare, diligence and skill that a reasonably prudent person would exercise incomparable circumstances.  The issuanceof any preferred shares in the face of a take-over bid for the Company would beexamined in light of these duties of the directors and other applicable case law.

Shareholder Actions

                The CBCA provides thatshareholders of the Company may, with leave of a court, bring an action in thename of and on behalf of the Company for the purpose of prosecuting, defendingor discontinuing an action on behalf of the Company.  In order to grant leave to permit such anaction, the CBCA provides that the court must be satisfied that the directorsof the Company were given adequate notice of the application, the shareholderis acting in good faith and that it appears to be in the Company’s bestinterests that the action be brought.

EmployeeParticipation Shares

                On February 16, 1995, the Boardof Directors of the Company authorized the issuance of 975,000 Series AParticipation Shares; on December 18, 1995, the Board of Directors of theCompany authorized the issuance of 555,000 Series B Participation Shares and onMay 12, 1999, the Board of Directors of the Company authorized the issuance of470,000 Series C Participation Shares. The Employee Participation Share Purchase Plan (the “EP Plan”) wasdiscontinued effective December 4, 2002.

                Each participation shareentitles the holder to receive cash dividends, if any, as may from time to timebe declared payable thereon, at the same time as dividends, if any, are paid onthe common shares of the Company, in an amount for each participation share ofa particular series which is equal to the proportion of the amount of thedividend declared on each common share that the subscription price of suchparticipation share is of the fair market value at the date of issuance of suchparticipation share.

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                In the event of a proposal,order or resolution for the liquidation, dissolution or winding-up of theCompany, whether voluntary or involuntary; or on the “Automatic Conversion Date”(as defined in the Articles of Amalgamation and the terms of the EP Plan); orat the option of the holder on a “Conversion Date” (as defined in the Articlesof Amalgamation and the terms of the EP Plan) other than the “AutomaticConversion Date” (as defined in the Articles of Amalgamation and the terms ofthe EP Plan), the participation shares will become common shares, and thenumber of common shares a holder receives on conversion is the number of commonshares which is determined by multiplying the number of participation sharesheld, or in the case of conversion on a Conversion Date other than theAutomatic Conversion Date, the number of participation shares which the holderelects to convert, by a fraction:

1.                the numerator ofwhich shall be the “EP Share Value”(as defined in the Articles of Amalgamationand the terms of the EP Plan) of a participation share of a particular seriesas at the earlier of the “Automatic Conversion Date” and a “Conversion Date,”as the case may be; and

2.                thedenominator of which shall be the “Fair Market Value of a Common Share” (asdefined in the Articles of Amalgamation and the terms of the EP Plan) as at theearlier of the two dates described in 1; provided that no fractional commonshares will be issued and no payment will be made in respect of fractionalcommon shares.

On January 14,2004, the 245,000 Series C participation shares, which were the onlyoutstanding employee participation shares, were converted into 54,896 commonshares of the Company.

Warrants

                In April 2004, the Company closed an equity financingoffering of 3,053,436 units consisting of one common share and one-half of oneshare purchase warrant per unit.  Eachwhole warrant entitled its holder to acquire one common share at a price ofCDN$8.50, subject to certain adjustments, at any time prior to April 24,2006.  The warrants are transferable.Holders of warrants do not, as such, have any voting rights or other rightattaching to the common shares until the warrants are properly exercised andcommon shares issuable upon the exercise of the warrants are issued.  All warrants expired unexercised on April 24,2006.

                Pursuant to the terms of the indenture relating tothe warrants entered into between the Company and Computershare InvestorServices Inc., subject to applicable law, the Company could purchase prior toApril 24, 2006, by private contract or otherwise, all of or any of the warrantsthen outstanding and any warrants so purchased would have been cancelled.  No warrants were purchased.

ShareholderRights Plan

                On May 16, 2002, theshareholders of the Company approved a Shareholder Rights Plan Agreement (the “RightsPlan”), which was reconfirmed at the Annual General Meeting dated May 18, 2005,the principal terms of which are as follows:

*                Effective Date*

                The Rights Plan became effectiveon April 23, 2002 (the “Effective Date”) and was approved by shareholders ofthe Company at its Annual and Special Meeting of shareholders held on May 16,2002.

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                *Term*

                The term of the Rights Plan isten years, subject to reconfirmation by shareholders at every third annualmeeting.

*                Issue of Rights*

                One right (a “Right”) attachesto each outstanding common share.

*                Rights Exercise Privilege*

                The Rights will separate fromthe shares to which they are attached and will become exercisable at the time(the “Separation Time”) that is ten trading days after the earlier of a personhaving acquired, or the commencement, announcement or other date determined bythe Board of Directors in respect of a takeover bid to acquire, 20% or more ofthe common shares, other than by an acquisition pursuant to a takeover bidpermitted by the Rights Plan (a “Permitted Bid”).

                The acquisition of Beneficial Ownership (as definedin the Rights Plan) by any person (an “Acquiring Person”), including othersacting in concert, of 20% or more of the common shares, other than by way of aPermitted Bid, is referred to as a “Flip-in Event.”  Under the Rights Plan, there are certainexceptions to that rule, including (i) the Company or a subsidiary of theCompany, (ii) a person who acquires 20% or more of the outstanding commonshares through, among other things, a share redemption or a Permitted Bid,(iii) an underwriter or selling group member during the course of a publicdistribution; or (iv) investment and fund managers, trust companies and otherpersons who are managing investment funds, pension funds or plans, estates oraccounts on behalf of another person, provided they are not making, or are notpart of a group making, a takeover bid. Any Rights held by an Acquiring Person on or after the earlier of theSeparation Time or the first date of public announcement by the Company or anAcquiring Person that an Acquiring Person has become such will become void uponthe occurrence of a Flip-in Event.

                Under the Rights Plan, a bidder is entitled to “lockup” any shareholder of the Company without triggering the Rights Plan so longas the lock-up agreement is a “soft” lock up, meaning the locked-up shareholderis entitled to tender to a higher offer (so long as the higher offer is notrequired under the lock-up agreement to be more than 7% higher than the firstoffer).

                Ten trading days after theoccurrence of the Flip-in Event, the Rights (other than those held by theAcquiring Person) will permit the holder to purchase, for the exercise price ofthe Rights, common shares having a value based on the then-prevailing marketprice) equal to twice such exercise price (i.e., at a 50% discount).  The exercise price of the Rights will be equalto five times the prevailing market price at the Separation Time.

                The issue of theRights is not initially dilutive.  Upon aFlip-in Event occurring and the Rights separating from the attached shares,reported earnings per common share on a fully diluted or non-diluted basis maybe affected.  Holders of Rights who donot exercise their Rights upon the occurrence of a Flip-in Event may suffersubstantial dilution.

*                Certificates and Transferability*

                Prior to the Separation Time,the Rights will be evidenced by a legend imprinted on certificates for commonshares issued from and after the Effective Date.  Rights are also attached to such sharesoutstanding on the Effective Date, although share certificates issued prior tothat date will not bear such a legend. Prior to the Separation Time, Rights will not be transferable separatelyfrom the attached shares.  

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Fromand after the Separation Time, the Rights will be evidenced by Rightscertificates which will be transferable and traded separately from the shares.

*                Permitted Bid Requirements*

                The requirements of a PermittedBid include the following:

·                                          the takeover bid must be made by way of atakeover bid circular to all holders of common shares;

·                                          the takeover bid must not permit common sharestendered pursuant to the takeover bid to be taken up prior to the expiry of aperiod of not less than sixty (60) days and only if at such time more than 50%of the common shares held by shareholders other than the bidder, itsaffiliates, associates and persons acting jointly or in concert with the bidder(the “Independent Shareholders”) have been tendered pursuant to the takeoverbid and not withdrawn; and

·                                          if more than 50% of the common shares held byIndependent Shareholders are tendered to the takeover bid within the sixty(60)-day period, the bidder must make a public announcement of that fact andthe takeover bid must remain open for deposits of common shares for anadditional ten (10) business days from the date of such public announcement.

                The Rights Plan allows acompeting Permitted Bid (a “Competing Permitted Bid”) to be made while aPermitted Bid is in existence.  ACompeting Permitted Bid must satisfy all the requirements of a Permitted Bidexcept that it may expire on the same date as the Permitted Bid, subject to therequirement that it be outstanding for a minimum period of thirty-five (35)days.

*                Waiver*

                The Board of Directors may,prior to a Flip-in Event, waive the dilutive effects of the Rights Plan inrespect of a particular Flip-in Event (an “Exempt Acquisition”) that wouldresult from a takeover bid made by way of a takeover bid circular to allholders of common shares, provided that in such circumstances the Board shallbe deemed to have waived the application of the Rights Plan to any otherFlip-in Event occurring as a result of a takeover bid made by way of a takeoverbid circular to all holders of common shares prior to the expiry of anytakeover bid in respect of which the Rights Plan has been waived.  The Board of Directors may also waive theRights Plan in respect of a particular Flip-in Event that has occurred throughinadvertence, provided that the Acquiring Person that inadvertently triggeredsuch Flip-in Event reduces its beneficial holdings to less than 20% of theoutstanding voting shares of the Company within fourteen (14) days or suchother period as may be specified by the Board of Directors.

*                Redemption*

                At any time prior to theoccurrence of a Flip-in Event, the Board of Directors may with the priorapproval of the holders of the common shares or the Rights redeem all, but notless than all, of the outstanding Rights at a price of CDN$0.000001 each.  Rights will be deemed to have been redeemedby the Board of Directors following completion of a Permitted Bid, CompetingPermitted Bid or Exempt Acquisition.

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*                Supplements and Amendments*

                The Company is authorized tomake amendments to the Rights Plan to correct any clerical or typographicalerror or, subject to subsequent ratification by shareholders or Rights holders,to maintain the validity of the Rights Plan as a result of changes in law orregulation.  Other amendments orsupplements to the Rights Plan may be made with the prior approval ofshareholders or Rights holders.

**ActionNecessary to Change Rights of Shareholders**

                In order to change the rights ofour shareholders, the Company would need to amend its Articles of Amalgamationto effect the change.  Such an amendmentwould require the approval of holders of two-thirds of the common shares castat a duly called special meeting.  Forcertain amendments such as those creating of a class of preferred shares, ashareholder is entitled under the Act to dissent in respect of such aresolution amending the Articles of Amalgamation and, if the resolution isadopted and the Company implements such changes, demand payment of the fair valueof its common shares.

**Meeting of Shareholders**

                An annual meetingof shareholders is held each year for the purpose of considering the financialstatements and reports, electing directors, appointing auditors and for thetransaction of other business as may be brought before the meeting.  The Board of Directors has the power to calla special meeting of shareholders at any time.

                Notice of the time and place ofeach meeting of shareholders must be given not less than twenty-one (21) days,nor more than fifty (50) days, before the date of each meeting to eachdirector, to the auditor and to each shareholder who at the close of businesson the record date for notice is entered in the securities register as theholder of one or more shares carrying the right to vote at the meeting.  Notice of meeting of shareholders called forany other purpose other than consideration of the minutes of an earliermeeting, financial statements and auditor’s report, election of directors andreappointment of the incumbent auditor, must state the nature of the businessin sufficient detail to permit the shareholder to form a reasoned judgment onand must state the text of any special resolution or bylaw to be submitted tothe meeting.

                The only persons entitled to bepresent at a meeting of shareholders are those entitled to vote, the directorsof the Company and the auditor of the Company. Any other person may be admitted only on the invitation of the chairmanof the meeting or with the consent of the meeting.  In circumstances where a court orders ameeting of shareholders, the court may direct how the meeting may be held,including who may attend the meeting.

                The holders of not less thanfive percent of the outstanding voting shares of the Company may requisitionthe directors of the Company to call a meeting of shareholders for the purposestated in the requisition.  Except inlimited circumstances, including where a meeting of shareholders has alreadybeen called and a notice of meeting already given or where it is clear that theprimary purpose of the requisition is to redress a personal grievance againstthe Company or its directors, officers or shareholders, the directors of theCompany shall call a meeting of shareholders. If the directors fail to call a meeting of shareholders withintwenty-one (21) days after receiving the requisition, any shareholder whosigned the requisition may call the meeting of shareholders and, unless theshareholders resolve otherwise at the meeting, the Company shall reimburse theshareholders for the expenses reasonably incurred by them in requisitioning,calling and holding the meeting of shareholders.

                The CBCA also provides that,except in limited circumstances, a resolution in writing signed by all of theshareholders entitled to vote on that resolution at a meeting of shareholdersis as valid as if it had been passed at a meeting of shareholders.

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**Limitationson Right to Own Securities**

                Neither Canadian law nor theCompany’s Articles of Amalgamation or bylaws limit the right of a non-residentto hold or vote common shares of the Company, other than as provided in theInvestment Canada Act (the “Investment Act”). The Investment Act prohibits implementation of certain direct reviewableinvestments by an individual, government or agency thereof, corporation,partnership, trust or joint venture that is not a “Canadian,” as defined in theInvestment Act (a “non-Canadian”), unless, after review, the ministerresponsible for the Investment Act is satisfied or is deemed to be satisfiedthat the investment is likely to be of net benefit to Canada.  An investment in the common shares of theCompany by a non-Canadian (other than a “WTO Investor,” as defined below) wouldbe reviewable under the Investment Act if it were an investment to acquiredirect control of the Company, and the book value of the assets of the Companywere CDN$5.0 million or more (provided that immediately prior to theimplementation of the investment the Company was not controlled by WTOInvestors).  An investment in commonshares of the Company by a WTO Investor (or by a non-Canadian other than a WTOInvestor if, immediately prior to the implementation of the investment, theCompany was controlled by WTO Investors) would be reviewable under theInvestment Act if it were an investment to acquire direct control of theCompany (in 2007) and the value of the assets of the Company equaled orexceeded CDN$281.0 million.  Anon-Canadian, whether a WTO Investor or otherwise, would be deemed to acquirecontrol of the Company for purposes of the Investment Act if he or she acquireda majority of the common shares of the Company. The acquisition of less than a majority, but at least one-third of theshares, would be presumed to be an acquisition of control of the Company,unless it could be established that the Company was not controlled in fact bythe acquirer through the ownership of the shares.  In general, an individual is a WTO Investorif he or she is a “national” of a country (other than Canada) that is a memberof the World Trade Organization (“WTO Member”) or has a right of permanentresidence in a WTO Member.  A corporationor other entity will be a “WTO Investor” if it is a “WTO Investor-controlledentity,” pursuant to detailed rules set out in the Investment Act.  The United States is a WTO Member.  Certain transactions involving the Company’scommon shares would be exempt from the Investment Act, including:

(a)                                  anacquisition of the shares if the acquisition were made in the ordinary courseof that person’s business as a trader or dealer in securities;

(b)                                 anacquisition of control of the Company in connection with the realization of asecurity interest granted for a loan or other financial assistance and not forany purpose related to the provisions of the Investment Act; and

(c)                                  anacquisition of control of the Company by reason of an amalgamation, merger,consolidation or corporate reorganization, following which the ultimate director indirect control in fact of the Company, through the ownership of votinginterests, remains unchanged.

# **Dividend Policy**

For the yearsended December 31, 2003, 2004, 2005 and 2006, we have not declared or paid anydividends on our common shares and there exists no plans to do so.

**MaterialContracts**

                On October 25, 1995, FrosstRadiopharmaceuticals, a division of Merck Frosst Canada Inc. (now known asDRAXIMAGE) entered into a non-exclusive distribution agreement with SyncorInternational Corporation (now known as Cardinal Health 414, Inc.) fordistribution in the U.S. of DTPA, a kit used to prepare Tc-99m Pentetate tostudy kidney clearance, and MDP, a kit used to prepare Tc-99m Methylene 

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DiphosphonicAcid to study bone metabolism.  Theinitial term was for five years, with automatic renewal of the agreement forsuccessive two-year periods.

                On July 12, 2000 DRAXIMAGEsigned a non-exclusive distribution agreement with Syncor InternationalCorporation (now known as Cardinal Health 414, Inc.) for the production of akit for the preparation of sodium iodide I-131 capsules and oral solutionindicated for the treatment of thyroid cancer and hyperthyroidism for sale inthe U.S.  The term of the agreement isfive years from the date DRAXIMAGE makes the first sale of the product.  The date of the first sale was March2003.  This agreement was amended onAugust 6, 2003 to provide that DRAXIMAGE could distribute the product toindependent radiopharmacies in the U.S.

                On July 1, 1999, DRAXIS Pharmaentered into a five-year manufacturing and supply agreement with Warner-LambertCanada Inc. (which then became known as Pfizer Consumer Healthcare, a divisionof Pfizer Canada Inc.) covering several non prescription products for theCanadian market, including PolysporinÒ, SudafedÒ, ActifedÒ and ZincofaxÒ. Manufacturing of these products commenced in early 2000.  On September 1, 2005, DRAXIS Pharma announcedit had renewed its agreement with Pfizer Canada for a three year term effectiveJanuary 1, 2005.  On December 20, 2006,DRAXIS Pharma was advised that J&J had purchased Pfizer’s consumerhealthcare business and that the agreement was assigned to J&J.

                On December 18, 2001, DRAXISPharma finalized supply and related agreements with GSK for the renewal andexpansion of an existing contract manufacturing relationship between thecompanies.  The products transferred toDRAXIS Pharma were all established, sterile products marketed by GSK inmultiple international markets.  In 2002,a prescription sterile injectable product for the U.S. market was added underthis contract and commercial production of this product commenced in the secondquarter of 2002.  During 2002, sitetransfer and related activities associated with the other GSK productscontinued and production started in the second quarter of 2003 and ramped upthrough 2003 and 2004 with full production achieved by the end of 2004.  DRAXIS Pharma shall manufacture the productscovered by the agreement until it receives a termination notice from GSK whichmay be given by a two-year advance written notice given on or after December31, 2007.

                On March 3, 2003, DRAXIS Pharmasigned a manufacturing agreement with Bone Care International, Inc. (nowGenzyme Corporation) to produce HectorolÒ Injection for sale in the U.S. and begancommercial shipments of the sterile injectable product in March 2003.  Production of HectorolÒ Injection increased substantially throughout 2005.  The agreement is for a five-year term.

                On July 22, 2003, the Company entered into an AssetPurchase Agreement with Shire, pursuant to which the Company sold Shire therights to substantially all remaining products of its Canadian pharmaceuticalsales and marketing division, DRAXIS Pharmaceutica, in return for $9.6 million(CDN$13.5 million) in cash and up to an additional $2.9 million (CDN$4.0million) in market-driven contingent milestone payments, plus royalties onfuture product sales.  Under the terms ofthe agreement, DRAXIS received the value of acquired inventories, and Shireassumed responsibility for the financial provisions of the license agreementrelated to Permax®.

OnSeptember 24, 2003, the Company, upon the recommendation of the Human Resourcesand Compensation Committee, entered into a Retirement Compensation Agreement (“RCA”)with Dr. Barkin to phase out the liability of the Company under the terminationwithout cause provisions of his employment agreement.  The RCA called for the Company to makepayments totalling CDN$1.4 million to Dr. Barkin, CDN$600,000 which was paid inAugust 2003; and the remaining CDN$800,000 to be paid in equal quarterlyinstallments in arrears commencing with the fourth quarter of 2003 and endingwith the 

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fourth quarter of 2005.  An amount of CDN$320,000 was paid in 2005 andno sum remains outstanding under the RCA. Dr. Barkin’s employment agreement was amended in 2003 to provide thatupon the last RCA payment, the Company shall have no liability toward Dr.Barkin with respect to the termination without cause provisions of hisemployment agreement.  However, in theevent of a termination without cause following a defined change of control ofthe Company, any payments received by Dr. Barkin pursuant to the RCA shall becredited to the lump sum amount to be paid to him upon said event.

                On June 23, 2004, in order toconform with the terms of the Stock Option Plan approved by the shareholders ofthe Company in 2001, the Company entered into an amended employment agreementwith Dr. Martin Barkin.  Under the termsof the amended employment agreement, in the event of termination of employmentfollowing a defined change of control of the Company, Dr. Barkin would beentitled to exercise all stock options and other securities, including thosenot then otherwise exercisable.

                In April 2003, the Companyentered into an employment agreement with Mr. Durham, pursuant to which Mr.Durham agreed to be employed as the President of DRAXIS Pharma Inc. (now knownas DRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.).  In the event that Mr. Durham is terminatedwithout cause, he would be entitled to receive a payment equal to one year ofbase salary.  In the event that Mr. Durhamis terminated without cause following a defined change of control, he would beentitled to receive a payment equal to two years of base salary.

                In October 2003, the Companyentered into an employment agreement with Ms. Gualtieri, pursuant to which Ms.Gualtieri agreed to be employed as General Counsel and Corporate Secretary ofDRAXIS.  In the event that Ms. Gualtieriis terminated without cause, she would be entitled to receive a payment equalto one year of base salary.  In the eventthat Ms. Gualtieri is terminated without cause following a defined change ofcontrol, she would be entitled to receive a payment equal to two years of basesalary.

                In March 2004, the Companyentered into an employment agreement with Mr. Huang, pursuant to which Mr.Huang agreed to be employed as Vice President Finance of DRAXIS.  In the event that Mr. Huang is terminatedwithout cause, he would be entitled to receive a payment equal to one year ofbase salary.  In the event that Mr. Huangis terminated without cause following a defined change of control, he would beentitled to receive a payment equal to two years of annual remuneration.

                In March 2004, the Companyentered into an employment agreement with Mr. Oleksiw, pursuant to which Mr.Oleksiw agreed to be employed as Chief Financial Officer of DRAXIS.  In the event that Mr. Oleksiw is terminatedwithout cause, he would be entitled to receive a payment equal to one year ofbase salary.  In the event that Mr.Oleksiw is terminated without cause following a defined change of control, hewould be entitled to receive a payment equal to two years of annualremuneration.

                In March 2004, in order toconform with the terms of the Stock Option Plan approved by the shareholders ofthe Company in 2001, the Company entered into amended employment agreementswith Mr. Carter, Mr. Durham, Ms. Gualtieri and Mr. Ormiston.  Under the terms of the amended employmentagreements, in the event of termination of employment without cause following adefined change of control of the Company, Mr. Carter, Mr. Durham, Ms. Gualtieriand Mr. Ormiston, as the case may be, would be entitled to exercise all stockoptions and other securities, including those not then otherwiseexercisable.  In addition, under the termsof the amended employment agreement, Ms. Gualtieri is entitled, in the event ofa termination without cause following a defined change of control, to receive apayment equal to two years annual remuneration.

                On April 27, 2004, the Companyentered into an employment agreement with Mr. Brazier, pursuant to which Mr.Brazier is entitled, in the event his employment is terminated without causeduring 

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theperiod commencing July 21, 2003 and ending July 21, 2005, to two times his basesalary.  This agreement was amended onAugust 25, 2004 to reflect that in the event that Mr. Brazier determines,during the period commencing June 1, 2005 and ending on December 31, 2005, inhis discretion, that the position of Senior Vice President CorporateDevelopment and Strategic Planning is not satisfactory to him, then he mayterminate his employment and receive the sum that the Company would have paidto him following the Shire transaction if his employment had been terminated atthat time following the change of control of DRAXIS Pharmaceutica.  The amendment also provides that in the eventthat Mr. Brazier is terminated without cause between the period commencing July21, 2003 and ending December 31, 2005, he would be entitled to receive apayment equal to two years of base salary. Further to the nomination of Mr. Brazier as Chief Operating Officer inOctober 2005, this employment agreement was further amended on December 20,2005 to provide that in the event of a termination without cause, Mr. Brazierwould be entitled to receive a payment equal to one year of base salary.  In the event of a termination without causefollowing a defined change of control, Mr. Brazier would be entitled to receivea payment equal to two years of annual remuneration.  The amended agreement also provides that theabovementioned sum relating to the Shire transaction is no longer available toMr. Brazier.

                On June 10, 2004, the Companyentered into an Amended and Restated Loan Agreement with the National Bank ofCanada providing an operating facility of CDN$15 million (or U.S. equivalent),payable within 364 days of drawing upon the facility and a term facility ofCDN$10 million (or U.S. equivalent), repayable in full in three years.  The operating facility can be extended by oneyear upon agreement with the Bank. Interest under both the term and operating facilities is based on theBank’s prime lending rate, depending on whether the Company meets certainratios which as at December 31, 2006 were met. As at December 31, 2006, no amount was drawn under the operatingfacility or the term facility.

                In April 2005, the Companyentered into an employment agreement with Mr. Robert, pursuant to which Mr.Robert agreed to be employed as President of the DRAXIMAGE division.  In the event that Mr. Robert is terminated withoutcause, he would be entitled to receive a payment equal to one year of basesalary.  In the event that Mr. Robert isterminated without cause following a defined change of control, he would beentitled to receive a payment equal to two years of base salary.

                On July 8, 2005, the Company,upon the recommendation of the Human Resources and Compensation Committee,entered into an agreement with Dr. Flanagan with respect to the payment of hislong term incentive award under the DRAXIMAGE Long Term Incentive Plan byentering into a Retirement Compensation Agreement (“RCA”) in his favour for atotal amount of CDN$2.2 million.  The RCAcalled for the Company to make payments totalling CDN$2.2 million to Dr.Flanagan.  An amount of CDN$932,222 was paidin 2005, an amount of CDN$724,444 was paid in 2006 and an amount of CDN$543,333was paid in 2007.  No sum remainsoutstanding under the RCA.

**ExchangeControls**

                Canada has no system of exchangecontrols.  There are no exchangerestrictions on borrowing from foreign countries or on the remittance ofdividends, interest, royalties and similar payments, management fees, loanrepayments, settlement of trade debts or the repatriation of capital.  There are no limits on the rights ofnon-Canadians to exercise voting rights on their common shares of the Company.

**Taxation**

                The following summary describesthe principal Canadian federal income tax considerations generally applicableunder the Income Tax Act (Canada) (the “ITA”) to a holder of the Company’scommon shares who holds common shares as capital property and who deals at arm’slength, and is not affiliated, with the Company, all within the meaning of theITA.  The common shares will generally be

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consideredto be capital property to a holder unless either the holder holds such commonshares in the course of carrying on a business of trading or dealing insecurities, or the holder has held or acquired such common shares in atransaction or transactions considered to be an adventure in the nature oftrade.  This summary is not applicable toa holder that is a ‘‘specified financial institution’’, as defined in the ITA,or to a holder an interest in which is a “tax shelter investment”, as definedin the ITA, or, for purposes of certain rules applicable to securities held by “financialinstitutions”.  Such holders of commonshares who are or may be subject to these provisions should consult their owntax advisors.  Persons to whom thissummary is applicable are referred to herein as “Holders.”

                This summary is based on thecurrent provisions of the ITA, the regulations thereunder in force on the datehereof, the Company’s understanding of the current published administrativepolicies and assessing practices of the Canada Revenue Agency and all proposedamendments to the ITA and regulations publicly announced by the Minister ofFinance (Canada) prior to the date hereof (the “Amendments”).  No assurance can be given that the Amendmentswill be enacted in the form proposed or at all. This summary is not exhaustive of all possible Canadian federal incometax considerations, and except as mentioned above, does not take into accountany prospective changes to the tax laws of Canada, whether occasioned bylegislative, governmental, or judicial action. Further, the summary does not take into account foreign or provincialtax legislation or considerations that may vary from the Canadian federalincome tax considerations described herein. This summary does not purport to be, nor should it be construed as,legal or tax-related advice to any holder of common shares.  Each holder of common shares should consulthis or her own tax advisor.

                All amounts, including the costof, dividends received on, and proceeds of disposition from, common shares mustbe determined in Canadian dollars at applicable exchange rates for the purposesof the ITA.

*Common Shareholders Not Residentin Canada*

                Thefollowing summary generally is applicable to a Holder of the Company’s commonshares who, at all relevant times and for the purposes of the ITA and anyapplicable tax treaty or convention, is not, and is not deemed to be, residentin Canada, does not hold or use and is not deemed to hold or use such commonshares in connection with, or in the course of carrying on a business inCanada, who is not an insurer that carries on an insurance business in Canadaand elsewhere and who is not an “authorized foreign bank”, as defined in theITA.  Such non-resident holders of commonshares to whom this summary is applicable are referred to herein as “Non-ResidentHolders.”

Dividendson Common Shares - shareholders who are not residents of Canada

                Dividends, including stock andcash dividends and certain distributions and redemptions deemed to be dividendsunder the ITA, on the common shares paid or deemed to be paid to a Non-ResidentHolder will be subject to Canadian withholding tax at a rate of 25%.  The applicable rate of withholding may,however, be reduced by virtue of the terms of any applicable tax treaty.  Under the Canada-United States Income TaxConvention, 1980 (the “Treaty”), the rate applicable to Non-Resident Holdersthat are United States residents who are beneficial owners of common shares isgenerally 15%.  Under the Treaty, certaintax-exempt entities that are resident in the United States may be exempt fromCanadian withholding taxes, including any withholding tax levied in respect ofdividends received on the common shares. Tax-exempt entities should consult their own tax advisors.

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Dispositionsby shareholders who are not residents of Canada

                A Non-Resident Holder will notbe subject to tax under the ITA in respect of any capital gains arising as aconsequence of the disposition of common shares (other than to the Company),except to the extent that such shares constitute or are deemed to constitutetaxable Canadian property (“TCP”) (as defined in the ITA) and the Non-ResidentHolder is not otherwise entitled to relief under the terms of any applicabletax treaty.  In general, provided thecommon shares are listed on a prescribed stock exchange (which currentlyincludes the TSX), the common shares will not constitute TCP of a Non-ResidentHolder unless at any time in the sixty-month period immediately preceding thedisposition, not less than 25% of the issued shares of any class of the capitalstock of the Company belonged to such person, either alone or in combinationwith persons with whom such Holder does not deal at arm’s length.

                If the common shares constituteTCP to a Non-Resident Holder, such Holder will normally be obliged to file aCanadian income tax return, recognize any gain and pay any tax thereon pursuantto the provisions of the ITA.  However,the Treaty will normally apply to exempt a Non-Resident Holder that is aresident of the United States from such tax, provided that the value of suchshares is not derived principally from real property situated in Canada and/orinterests therein at the time the common shares are disposed of.  

                Provided that the common sharesare listed on a prescribed stock exchange (including the TSX) at the time ofthe disposition of such shares, no clearance certificate will be required undersection 116 of the ITA in respect of a disposition of such shares.

*CommonShareholders Resident in Canada*

                The following summary generallyis applicable to Holders who, at all relevant times and for purposes of the ITAand any applicable tax treaty or convention, are, or are deemed to be, residentin Canada.

Dividendson Common Shares - shareholders who are residents of Canada

                Dividends, including stock andcash dividends and certain distributions and redemptions deemed to be dividendsunder the ITA, on the common shares of the Company paid to Holders who areresidents of Canada will be included in computing their income for purposes ofthe ITA.  Such dividends received ordeemed to be received by an individual (other than a trust) will generally besubject to the gross-up and dividend tax credit rules normally applicable totaxable dividends received from taxable Canadian corporations.  The Amendments propose to enhance thegross-up and  dividend tax credit inrespect of “eligible dividends” received after 2005 from taxable Canadiancorporations such as the Company. Eligible dividends will generally include dividends paid after 2005 bytaxable Canadian corporations, where those dividends have been designated aseligible dividends by the dividend paying corporation.  No assurance can be given that suchAmendments will be enacted.  Dividendsreceived or deemed to be received on such shares by an individual and certaintrusts may give rise to alternative minimum tax.  

                Generally, dividends received ordeemed to be received on common shares of the Company by a Holder that is acorporation resident in Canada will be included in computing the corporation’sincome, but will be deductible in computing the corporation’s taxable income,subject to certain limitations in the ITA. A Holder of common shares that is a “private corporation” or a “subjectcorporation” (as defined in the ITA) generally will be subject to a refundabletax of 331⁄3% on dividends received or deemed to be received on such sharesto the extent that such dividends are deductible in computing the Holder’staxable income.  Subsection 55(2) of theITA provides that where certain corporate holders of shares receive a dividendor deemed dividend in specified circumstances, all or part of such dividend maybe treated as a capital gain from the disposition of capital property and notas a dividend.

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Dispositionby shareholders who are residents of Canada

On a disposition or deemeddisposition of a common share of the Company a Holder that is a resident ofCanada will realize a capital gain (or capital loss) equal to the amount bywhich the proceeds of disposition for the common share exceed (or are lessthan) the aggregate of any reasonable costs of disposition and the adjustedcost base to the Holder of the common share immediately before thedisposition.  Generally, one half of anycapital gain (a “Taxable Capital Gain”) realized by a Holder in a taxation yearwill be included in the Holder’s income in the year.

Subject to and inaccordance with the provisions of the ITA, one-half of any capital loss (an “AllowableCapital Loss’”) realized by a Holder in a taxation year must be deducted fromTaxable Capital Gains realized by the Holder in the year and Allowable CapitalLosses in excess of Taxable Capital Gains may be carried back and deducted inany of the three preceding taxation years or carried forward and deducted inany subsequent taxation year against net taxable capital gains realized in suchyears.  The amount of any capital lossrealized by a Holder that is a corporation on the disposition of a common sharemay be reduced by the amount of dividends received or deemed to be received byit on such common share (or on a share for which the common shares has beensubstituted) to the extent and under the circumstances prescribed by theITA.  Similar rules may apply where acorporation is a member of a partnership or a beneficiary of a trust that ownscommon shares, directly or indirectly, through a partnership or a trust.

A “Canadian-controlledprivate corporation” (as defined in the ITA) will also be subject to arefundable tax of 6 2/3% on certain investment income, including taxablecapital gains realized on the disposition of common shares of the Company, thatwill be refundable when the corporation pays taxable dividends (at a rate ofCDN$1.00 for every CDN$3.00 of taxable dividend paid).

Capital gains realized byan individual or certain trusts may give rise to a liability for alternativeminimum tax.

**Documentson Display**

We are subject to theinformation requirements of the U.S. Securities Exchange Act of 1934, asamended.  In accordance with theserequirements, we file reports and other information with the United StatesSecurities and Exchange Commission. These materials, including this Annual Report (Form 20-F) and theexhibits thereto, may be inspected and copied at the Commission’s Public ReferenceRoom at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission’sregional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois60661.  Copies of the materials may beobtained from the Public Reference Room of the Commission at 450 Fifth Street,N.W., Washington, D.C. 20549 at prescribed rates.  The public may obtain information on theoperation of the Commission’s Public Reference Room by calling the Commissionin the United States at 1-800-SEC-0330. The Commission also maintains a website at www.sec.gov that containsreports, proxy statements and other information regarding registrants that fileelectronically with the Commission.  TheCompany’s annual reports and some of the other information submitted by theCompany to the Commission may be accessed through this website.  In addition, material filed by the Companycan be inspected at the offices of the NASDAQ at 9801 Washingtonian Blvd.,Gaithersburg, MD 20878, and on the Canadian Securities Administrators’electronic filing system, SEDAR, accessible at the website www.sedar.com.  This material includes the Company’sManagement Information Circular for its annual meeting to be held on May 17,2007, which provides information including directors’ and officers’,remuneration and indebtedness, principal holders of securities and securitiesauthorized for issuance under equity compensation plans.  Additional financial information is providedin our annual financial statements for the year ended December 31, 2006 and ourManagement’s Discussion and Analysis relating to these statements.  These documents are also accessible

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on SEDAR (www.sedar.com).

**Item 11.            Quantitative and QualitativeDisclosures About Market Risk**

**Market Risk**

We are exposed tofinancial market risks, including changes in foreign currency exchange ratesand interest rates on investments.  We donot use derivative financial instruments for speculative or trading purposes.

Inflation has not had asignificant impact on our results of operations.

**ForeignCurrency Risk**

Our reporting currency isthe U.S. dollar.  The functional currencyfor our Canadian operations, which includes the radiopharmaceutical segment,contract manufacturing segment and royalties and milestones related to productrights sold to Shire, is the Canadian dollar. Accordingly, our foreign exchange exposure for accounting purposesmainly relates to U.S.-denominated monetary assets of these operations.  We do not currently use derivativeinstruments to hedge our foreign exchange risk and currently have no plans todo so in the near future.  For fiscalyear 2006, U.S. dollar revenue accounted for approximately 53.8% of the Company’srevenue.  During this same period, thevalue of the U.S. dollar versus the Canadian dollar strengthened by 0.2% fromJanuary 1, 2006 to December 31, 2006.  Asa result, in 2006 we had to charge to income $282,000 due to foreign exchangetranslation gain related to the strengthening of the U.S. dollar.  See “Risk Factors — Risks Related to OurCompany — We are Exposed to Exchange Rate Fluctuations which could NegativelyAffect our Business”.

**InterestRate Risk**

The primary objective of our investment policy isthe protection of principal, and accordingly we invest in high-grade commercialpaper and government securities with varying maturities, but typically lessthan 90 days.  As it is our intent andpolicy to hold these investments until maturity, we believe we do not have amaterial exposure to interest rate risk.

We currently have no outstanding third party debt,but we do have access to undrawn credit facilities with variable interestrates.  Should we borrow in the future onour existing facilities, any material changes to interest rates could result inmaterially increased interest expense and decreased results of operations.

**Item 12.            Description of Securities Other ThanEquity Securities**

Not Applicable

**PART II.**

**Item 13.            Defaults, Dividends Arrearages andDelinquencies**

Not Applicable

**Item 14.            Material Modifications to the Rightsof Security Holders and Use of Proceeds**

Not Applicable

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**Item 15T.          Controls and Procedures**

A.                                   DisclosureControls and Procedures

As at the end of the period covered by thisreport, our Chief Executive Officer and our Chief Financial Officer, togetherwith members of our senior management, have carried out an evaluation of theeffectiveness of the design and operation of our disclosure controls andprocedures.  These are defined (in Rule13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended)as those controls and procedures designed to ensure that information requiredto be disclosed in reports filed under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within specified timeperiods.  As of the date of the evaluation,our Chief Executive Officer and Chief Financial Officer concluded that thedesign and operation of these disclosure controls and procedures wereeffective.

B.                                     Management’sAnnual Report on Internal Control over Financial Reporting

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting for the Company.Internal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of our financial reporting forexternal purposes in accordance with accounting principles generally acceptedin the United States of America. Internal control over financial reportingincludes maintaining records that in reasonable detail accurately and fairlyreflect our transactions; providing reasonable assurance that transactions arerecorded as necessary for preparation of our financial statements; providingreasonable assurance that receipts and expenditures of Company assets are madein accordance with management authorization; and providing reasonable assurancethat unauthorized acquisition, use or disposition of Company assets that couldhave a material effect on our financial statements would be prevented ordetected on a timely basis. Because of its inherent limitations, internalcontrol over financial reporting is not intended to provide absolute assurancethat a misstatement of our financial statements would be prevented or detected.

Management conducted an evaluation of theeffectiveness of our internal control over financial reporting based on the frameworkin Internal Control - Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission. Based on this evaluation,management concluded that the Company’s internal control over financialreporting was effective as of December 31, 2006.

This annual report does not include an attestationreport of the Company’s registered public accounting firm regarding internalcontrol over financial reporting. Management’s report was not subject toattestation by the Company’s registered public accounting firm pursuant totemporary rules of the Securities and Exchange Commission that permit theCompany to provide only management’s report in this Annual Report (Form 20-F).

There was no change during the fiscal year endedDecember 31, 2006 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

C.                                     Changesin Internal Control Over Financial Reporting

There have occurred no changes in our internalcontrol over financial reporting (as defined in Rule 13a-15 or 15d-15 under theExchange Act) during the period covered by this Annual Report (Form 20-F) thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

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The information furnished pursuant to Item 15T ofthis Annual Report (Form 20-F) shall not be deemed “filed” for purposes of theSecurities Exchange Act of 1934, as amended, nor shall it be incorporated byreference into any of the Company’s filings under the Securities Act of 1933,as amended, unless otherwise expressly stated in such filing.

**Item 16A.**         **Audit Committee FinancialExpert**

The Company’s Board of Directors has determinedthat Mr. Rolf Henel, a member of the Company’s Audit Committee, is a financialexpert.  Mr. Henel is an independentdirector under each of definitions of such terms under the applicable Canadian,TSX, U.S. and NASDAQ rules.

**Item 16B.         Code of Ethics and Business Conduct**

In April 2004, weamended our existing Code of Ethics, which resulted in the establishment of anew Code of Ethics and Business Conduct (the “Code”) in light of our continuedcommitment to honesty and integrity in the conduct of its business.  The Code applies to all our directors,officers and employees, including our Chief Executive Officer, our ChiefFinancial Officer and all employees of our subsidiaries.  The Code is available on our website atwww.draxis.com and was filed on SEDAR (www.sedar.com) on August 31, 2005.

In accordance withthe terms of the Code, the Audit Committee receives quarterly reports from theVice President, Administration and Shared Services on any concerns raisedregarding accounting, internal accounting controls and auditing matters.  The Board of Directors monitors compliancewith the Code by receiving quarterly reports from the Audit Committee regardingany concerns raised.  Complaints receivedby any officer concerning any violation of the Code are brought to theattention of the Board of Directors.  TheCode is distributed and signed by each of the Company’s employees when they arehired and it is available on the Company’s intranet and in each employeehandbook.  Information sessions are givento employees on the contents and application of the Code.

**Item 16C.         Principal Accountant Fees and Services**

In accordance withthe Audit Committee Charter, the Audit Committee pre-approves all auditingservices and permitted non-audit services (including fees and terms thereof) tobe performed for the Company or its subsidiaries by its Independent RegisteredChartered Accountants.  All the servicesof Deloitte & Touche LLP rendered in 2006 were pre-approved by the AuditCommittee.

Deloitte &Touche LLP has served as our Independent Registered Chartered Accountants foreach of the fiscal years in the three-year period ended December 31, 2006, forwhich audited financial statements appear in this Annual Report (Form 20-F).

**2006 Audit Fees**

The fees for allaudit services performed by Deloitte & Touche LLP, Independent RegisteredChartered Accountants (“Company’s auditor” or “Company’s principal accountant”)for the Company and its subsidiaries for the year ended December 31, 2006 wereCDN$306,000. Services provided include the audit of the Company’s consolidatedfinancial statements, review of the notes to the annual report to shareholders,management proxy circular, quarterly reviews and this Annual Report (Form20-F).  No hours were expended in theaudit of our financial statements by persons other than the Company’s principalaccountant.

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**2006 Audit-RelatedFees**

The aggregate fees billed for the year ended December31, 2006 for assurance and related services by the Company’s auditor that arereasonably related to the performance of the audit or review of the Company’sfinancial statements were CDN$Nil.

**2006 Tax Fees**

The aggregate feesbilled for the year ended December 31, 2006 for professional services renderedby the Company’s auditor for tax compliance, tax advice and tax planning wereCDN$39,750.

**2006 All Other Fees**

The aggregate feesbilled for the year ended December 31, 2006 for products and services providedby the Company’s principal accountant, other than those described above, were$Nil.

**2005 Audit Fees**

The fees for allaudit services performed by the Company’s auditor for the Company and its subsidiariesfor the year ended December 31, 2005 were CDN$300,000.

**2005 Audit-RelatedFees**

The aggregate fees billed for the year ended December 31, 2005 forassurance and related services by the Company’s auditor that are reasonablyrelated to the performance of the audit or review of the Company’s financialstatements were CDN$Nil.

**2005 Tax Fees**

The aggregate fees billed for the year ended December 31, 2005 forprofessional services rendered by the Company’s auditor for tax compliance, taxadvice and tax planning was CDN$41,950.

**2005 All Other Fees**

The aggregate feesbilled for the year ended December 31, 2005 for products and services providedby the Company’s principal accountant, other than those described above, wereCDN$Nil.

**Interest of Auditors**

Deloitte &Touche LLP are the Independent Registered Chartered Accountants of the Companyand are independent within the meaning of the Code of Ethics of the Ordre descomptables agréés du Québec, and of the Securities Act of 1933 and theapplicable rules and regulations thereunder adopted by the Securities andExchange Commission (“SEC”) and the Public Company Accounting Oversight Board(United States).

**Item 16D.         Exemptions from the Listing Standardsfor Audit Committees**

Not applicable.

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**Item 16E.          Purchases of Equity Securities by theIssuer and Affiliated Purchasers**

OnDecember 7, 2005, the Board of Directors authorized the purchase of up to 10%of the public float of the Company’s common shares through a Normal CourseIssuer Bid (the “2005 Issuer Bid”).  The2005 Issuer Bid enabled the Company to purchase on the open market through thefacilities of the Toronto Stock Exchange up to 3,522,530 common shares forcancellation.  As at December 6, 2005,there were 41,652,271 common shares outstanding of which approximately 90%were widely held.  Pursuant to theacceptance by the TSX of the Notice of Intention to make a Normal Course IssuerBid, which was received by the Company on December 13, 2005, the Companywas authorized to purchase common shares under the 2005 Issuer Bid commencingon December 15, 2005, and until December 14, 2006, or until such earlier datewhen the Company purchased the maximum allowable number of shares or elected toterminate the bid.  As of December 14,2006 (the last day of the 2005 Issuer Bid), the Company had purchased 788,800common shares under the 2005 Issuer Bid for an average market price of CDN$5.21, inclusive of commission, representingan aggregate consideration of CDN$4,106,357.

On November 1, 2006, the Board of Directors authorizedthe purchase of up to 10% of the public float of the Company’s common sharesthrough another Normal Course Issuer Bid (the “2006 Issuer Bid”) to becommenced after the terminated 2005 Issuer Bid. The 2006 Issuer Bid enables the Company to purchase on the open marketthrough the facilities of the Toronto Stock Exchange up to 3,397,011 commonshares for cancellation, representing 10% of the 33,970,112 common shares inthe public float as at December 14, 2006. Pursuant to the acceptance by the Toronto Stock Exchange of the Noticeof Intention to make a Normal Course Issuer Bid, which was received by theCompany on December 18, 2006, the Company was authorized to purchase commonshares under the 2006 Issuer Bid commending on December 20, 2006 and may continueuntil December 19, 2007, or until such earlier date when the Company purchasesthe maximum allowable number of shares or elects to terminate the bid.  As of March 19, 2007, the Company hadnot purchased any common shares under the 2006 Issuer Bid.

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**ISSUER PURCHASES OF EQUITYSECURITIES**

**2005 Issuer Bid**
| **Period**     | ** ** | **(a) Total Number  of Shares (Or Units)  Purchased** | ** ** | **(b) Average Price  Paid  per Share (or Units)** | ** ** | **(c) Total Number of  Shares (or Units)  Purchased as Part of  Publicly Announced Plans or Programs** | ** ** | **(d) Maximum Number  (or Approximate Dollar Value)  of Shares (or Units) that  May Yet Be Purchased  Under the Plans or Programs** |
|----------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|
|           |       |                                                  |       |                                                   |       |                                                                                                   |       |                                                                                                                                |
| December 2005  |       | 75,600                                                |       | $4.37 (CDN$5.07)                                       |       | 75,600                                                                                                 |       | 3,446,930                                                                                                                           |
| January 2006   |       | 37,400                                                |       | $4.43 (CDN$5.10)                                       |       | 113,000                                                                                                |       | 3,409,530                                                                                                                           |
| February 2006  |       | 58,400                                                |       | $4.58 (CDN$5.28)                                       |       | 171,400                                                                                                |       | 3,351,130                                                                                                                           |
| March 2006     |       | 27,800                                                |       | $4.71 (CDN$5.35)                                       |       | 199,200                                                                                                |       | 3,323,330                                                                                                                           |
| April 2006     |       | 124,200                                               |       | $4.35 (CDN$4.99)                                       |       | 323,400                                                                                                |       | 3,199,130                                                                                                                           |
| May 2006       |       | —                                                |       | —                                                 |       | 323,400                                                                                                |       | 3,199,130                                                                                                                           |
| June 2006      |       | —                                                |       | —                                                 |       | 323,400                                                                                                |       | 3,199,130                                                                                                                           |
| July 2006      |       | —                                                |       | —                                                 |       | 323,400                                                                                                |       | 3,199,130                                                                                                                           |
| August 2006    |       | —                                                |       | —                                                 |       | 323,400                                                                                                |       | 3,199,130                                                                                                                           |
| September 2006 |       | —                                                |       | —                                                 |       | 323,400                                                                                                |       | 3,199,130                                                                                                                           |
| October 2006   |       | 465,400                                               |       | $4.66 (CDN$5.27)                                       |       | 788,800                                                                                                |       | 2,733,730                                                                                                                           |
| November 2006  |       | —                                                |       | —                                                 |       | 788,800                                                                                                |       | 2,733,730                                                                                                                           |
| December 2006  |       | —                                                |       | —                                                 |       | 788,800                                                                                                |       | 2,733,730                                                                                                                           |
| Total          |       | 788,800                                               |       | $4.57 (CDN$5.21)                                       |       | 788,800                                                                                                |       | 2,733,730                                                                                                                           |

 

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**2006 Issuer Bid**
| **Period**                                     | ** ** | **(a) Total Number  of Shares (Or Units)  Purchased** | ** ** | **(b) Average Price  Paid  per Share (or Units)** | ** ** | **(c) Total Number of  Shares (or Units)  Purchased as Part of  Publicly Announced Plans or Programs** | ** ** | **(d) Maximum Number  (or Approximate Dollar Value)  of Shares (or Units) that  May Yet Be Purchased  Under the Plans or Programs** |
|------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|
|                                           |       |                                                  |       |                                                   |       |                                                                                                   |       |                                                                                                                                |
| December 2006                                  |       | —                                                |       | —                                                 |       | —                                                                                                 |       | 3,397,011                                                                                                                           |
| January 2007                                   |       | —                                                |       | —                                                 |       | —                                                                                                 |       | 3,397,011                                                                                                                           |
| February 2007                                  |       | —                                                |       | —                                                 |       | —                                                                                                 |       | 3,397,011                                                                                                                           |
| March 2007 (up  to March 19, 2007 inclusively) |       | —                                                |       | —                                                 |       | —                                                                                                 |       | 3,397,011                                                                                                                           |
| Total                                          |       | —                                                |       | —                                                 |       | —                                                                                                 |       | 3,397,011                                                                                                                           |
|                                                |            |                                                       |            |                                                        |            |                                                                                                        |            |                                                                                                                                     |  |  |  |  |

 

**PART III.**

**Item 17. Financial Statements**

NotApplicable.

**Item 18. Financial Statements**

The followingfinancial statements are filed as part of this Annual Report (Form 20-F).

| Management’s Report                                               |   | F-1 |
|------------------------------------------------------------------------|--------|-----|
| Report of Independent Registered Chartered Accountants                 |   | F-2 |
| Consolidated statements of operations                                  |   | F-4 |
| Consolidated  balance sheets                                           |   | F-5 |
| Consolidated Statements of Changes in Equity and  Comprehensive Income |   | F-6 |
| Consolidated statements of cash flows                                  |   | F-7 |
| Notes to the consolidated financial statements                         |   | F-8 |

125

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**Item 19. Exhibits**
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1         |       | Articles of Amalgamation of DRAXIS Health Inc.  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2000, filed on June 29, 2001 (SEC file no.  000-17434))                                                                                                                                                                                                                                                                                                     |
| 1.2         |       | By-law No. 1 of DRAXIS Health Inc. (formerly  Deprenyl Research Limited) (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2000, filed on June  29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                                                       |
| 4.1         |       | Master Agreement dated November 12, 1997 among  DRAXIS Health Inc., Deprenyl Animal Health Inc. and Pfizer Inc. (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                     |
| 4.2         |       | License Agreement dated November 12, 1997 between  Deprenyl Animal Health Inc. and Pfizer Inc. (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended December 31,  2000, filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                                      |
| 4.3         |       | Letter Agreement dated December 22, 1999 between  DRAXIS Health Inc., Deprenyl Animal Health Inc. and Pfizer Inc. (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                   |
| 4.4         |       | Second Amendment dated December 18, 2001 to the  Master Agreement, as amended December 22, 1999, License Agreement, Research  Agreement, U.S. and Canada Manufacturing and Supply Agreement and  International Manufacturing and Supply Agreement between Pfizer Inc.,  Deprenyl Animal Health, Inc. and DRAXIS Health Inc. dated November 12, 1997  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2001, filed on May 20, 2002 (SEC file no.  000-17434)) |
| 4.5         |       | Amending Agreement dated March 31, 2003 between  DRAXIS Health, Inc., Elan Pharma International Limited and Elan  Pharmaceuticals, Inc. (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2002, filed on May  14, 2003 (SEC file no. 000-17434))                                                                                                                                                                                                              |
| 4.6         |       | First Amendment to  Subscription Agreement dated October 24, 2002 among SGF Santé Inc., DRAXIS  Health Inc. and DRAXIS Pharma Inc. (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2002,  filed on May 14, 2003 (SEC file no. 000-17434))                                                                                                                                                                                                              |
| 4.7         |       | Share Purchase Agreement dated April 22, 2004  between DRAXIS Health Inc. and SGF Santé Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file No. 000-17434))                                                                                                                                                                                                                                                    |
| 4.8         |       | Share Purchase Agreement dated July 16, 2003  between Mohammed Barkat and DRAXIS Pharma Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file No. 000-17434))                                                                                                                                                                                                                                                    |
| 4.9         |       | Share Purchase Agreement dated July 16, 2003  between Michel Sauvageau and DRAXIS Pharma Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file No. 000-17434))                                                                                                                                                                                                                                                   |

 

126

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| 4.10       |   | Term Loan Agreement dated June 9, 1998 between  National Bank of Canada and DRAXIS Pharma Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                                          |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.11       |   | Credit Agreement dated February 18, 2000 between  National Bank of Canada and DRAXIS Pharma Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                                        |
| 4.12       |   | Underwriting Agreement dated April 2, 2004 between  DRAXIS Health Inc., Desjardins Securities Inc. and CIBC World Markets Inc.  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2003, filed on May 14, 2004 (SEC file No.  000-17434))          |
| 4.13† |   | Asset Purchase Agreement dated  July 22, 2003 between DRAXIS Health Inc. and Shire Biochem Inc. (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2003, filed on May 14, 2004 (SEC file No. 000-17434))                                          |
| 4.14       |   | Stock Option Plan of DRAXIS Health Inc., as amended,  dated June 27, 2001 (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2003, filed on May 14, 2004  (SEC file No. 000-17434))                                                                |
| 4.15       |   | DRAXIS Health Inc. Employee Stock Ownership Plan,  amended and restated, effective December 1, 1998 (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                                     |
| 4.16       |   | DRAXIS Health Inc. Employee Participation Share  Purchase Plan, effective February 16, 1995 (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended December 31,  2000, filed on June 29, 2001 (SEC file no. 000-17434))                                             |
| 4.17       |   | DRAXIS Health Inc. Deferred Share Unit Plan for  Employees (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on June 29, 2001 (SEC  file no. 000-17434))                                                                              |
| 4.18       |   | DRAXIS Health Inc. Equity Purchase Plan  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2000, filed on June 29, 2001 (SEC file no.  000-17434))                                                                                                |
| 4.19       |   | DRAXIS Retirement Savings Program (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2002, filed on May 14, 2003 (SEC file no. 000-17434))                                                                                                        |
| 4.20       |   | Shareholder Rights Plan Agreement dated April 23,  2002 between DRAXIS Health Inc. and Computershare Trust Company of Canada as  trustee (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2001, filed on May 20, 2002 (SEC  file no. 000-17434)) |
| 4.21       |   | Employment Agreement dated April 15, 1999 between  DRAXIS Health Inc. and Dr. Martin Barkin (incorporated herein by reference to  the Company’s Annual Report (Form 20-F) for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434))                                             |
| 4.22       |   | Amendment dated June 14, 2000 to Employment  Agreement dated April 15, 1999 between DRAXIS Health Inc. and Dr. Martin  Barkin (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2000, filed on June 29, 2001 (SEC file  no. 000-17434))           |

 

127

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| 4.23 |   | Retirement Compensation Agreement dated September  24, 2003 between DRAXIS Health Inc. and Dr. Martin Barkin (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2003, filed on May 14, 2004 (SEC file No. 000-17434))                             |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.24 |   | Employment Agreement dated April 27, 2004 between  DRAXIS Health Inc. and Dan Brazier (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2003,  filed on May 14, 2004 (SEC file No. 000-17434))                                                    |
| 4.25 |   | Employment Agreement dated October 18, 2000  between DRAXIS Health Inc. and Jack A. Carter (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                               |
| 4.26 |   | Amendment dated March 26, 2004 to Employment  Agreement dated October 18, 2000 between DRAXIS Health Inc. and Jack A.  Carter (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC file  No. 000-17434))  |
| 4.27 |   | Employment Agreement dated April 22, 2003  between DRAXIS PHARMA Inc. and John E.M. Durham (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file No. 000-17434))                                          |
| 4.28 |   | Amendment dated March 26, 2004 to Employment  Agreement dated April 22, 2003 between DRAXIS PHARMA Inc. and John E.M.  Durham (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC file  No. 000-17434))  |
| 4.29 |   | Employment Agreement dated October 17, 2003  between DRAXIS Health Inc. and Alida Gualtieri (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file No. 000-17434))                                         |
| 4.30 |   | Amendment dated March 26, 2004 to Employment  Agreement dated October 17, 2003 between DRAXIS Health Inc. and Alida  Gualtieri (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC  file No. 000-17434)) |
| 4.31 |   | Employment Agreement dated March 9, 2004  between DRAXIS Health Inc. and Chien Huang (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended December 31,  2003, filed on May 14, 2004 (SEC file No. 000-17434))                                                |
| 4.32 |   | Employment Agreement dated March 9, 2004  between DRAXIS Health Inc. and Mark Oleksiw (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended December 31,  2003, filed on May 14, 2004 (SEC file No. 000-17434))                                               |
| 4.33 |   | Employment Agreement dated May 14, 2001 between  DRAXIS Health Inc. and Jerry Ormiston (incorporated herein by reference to  the Company’s Annual Report (Form 20-F) for the year ended December 31, 2001,  filed on May 20, 2002 (SEC file no. 000-17434))                                                   |
| 4.34 |   | Amendment dated March 26, 2004 to Employment  Agreement dated May 14, 2001 between DRAXIS Health Inc. and Jerry  Ormiston (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC  file No. 000-17434))      |

 

128

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| 4.35       |   | Employment Agreement dated October 1, 1997 between  DRAXIS Health Inc. and Dr. Richard J. Flanagan (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file No. 000-17434))                                                                                                                                                                                  |
|------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.36       |   | Amendment dated July 23, 2001 to Employment  Agreement dated October 1, 1997 between DRAXIS Health Inc. and Dr. Richard J.  Flanagan (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC  file No. 000-17434))                                                                                                                                                |
| 4.37† |   | Non Exclusive Distribution Agreement dated October  25, 1995 between Frosst Radiopharmaceuticals, a division of Merck Frosst  Canada Inc. (now known as DRAXIMAGE) and Syncor International Corporation  (now known as Cardinal Health 414, Inc.) (incorporated herein by reference to  the Company’s Annual Report (Form 20-F) for the year ended December 31, 2004,  filed on March 31, 2005 (SEC file No. 000-17434))                                 |
| 4.38† |   | Non Exclusive Distribution Agreement dated July 12,  2000 between DRAXIMAGE and Syncor International (now known as Cardinal Health  414, Inc.) (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2004, filed on March 31, 2005  (SEC file No. 000-17434))                                                                                                                                    |
| 4.39† |   | Amendment dated August 6, 2003 to Non Exclusive  Distribution Agreement dated July 12, 2000 between DRAXIMAGE and Syncor  International (now known as Cardinal Health 414, Inc.) (incorporated herein  by reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2004, filed on March 31, 2005 (SEC file No. 000-17434))                                                                                                  |
| 4.40† |   | Manufacturing and Supply Agreement dated July 1,  1999 between Warner-Lambert Canada Inc. (now known as Pfizer Consumer  Healthcare, a Division of Pfizer Canada Inc.) and DRAXIS Pharma Inc. (now  known as DRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.)  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2004, filed on March 31, 2005 (SEC file No.  000-17434)) |
| 4.41† |   | Supply Agreement dated December 18, 2001 between  GlaxoSmithKline Inc. and DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a  division of DRAXIS Specialty Pharmaceuticals Inc.) (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2004, filed on March 31, 2005 (SEC file No. 000-17434))                                                                                                  |
| 4.42† |   | Manufacture and Supply Agreement entered into  between DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a division of DRAXIS  Specialty Pharmaceuticals Inc.) and Bone Care International, Inc. on March 3,  2003 (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2004, filed on March 31, 2005 (SEC file  No. 000-17434))                                                                  |
| 4.43       |   | Amendment dated August 25, 2004 to Employment  Agreement dated April 27, 2004 between DRAXIS Health Inc. and Dan Brazier  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2004, filed on March 31, 2005 (SEC file No.  000-17434))                                                                                                                                                         |
| 4.44       |   | Amended and Restated Loan Agreement dated June 10,  2004 between DRAXIS Health Inc. and National Bank of Canada (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2004, filed on March 31, 2005 (SEC file No. 000-17434))                                                                                                                                                                   |

 

129

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| 4.45       |   | Amendment dated June 23, 2004 to Employment  Agreement dated April 15, 1999 between DRAXIS Health Inc. and Martin Barkin  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2004, filed on March 31, 2005 (SEC file No.  000-17434))                                                         |
|------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.46       |   | Amendment to Credit Facilities for DRAXIS Pharma  Inc. dated March 28, 2002 between National Bank of Canada and DRAXIS Pharma Inc.  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2001, filed on May 20, 2002 (SEC file No.  000-17434))                                                 |
| 4.47       |   | Loan Agreement dated March 28, 2002 among DRAXIS  Pharma Inc., SGF Santé Inc. and DRAXIS Health Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2001, filed on May 20, 2002 (SEC file No. 000-17434))                                                                           |
| 4.48       |   | Loan Agreement dated March 28, 2002 among DRAXIS  Pharma Inc., Investissement Québec and DRAXIS Health Inc. (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2001, filed on May 20, 2002 (SEC file No. 000-17434))                                                                    |
| 4.49       |   | First Amendment to Subscription Agreement dated  October 24, 2002 among SGF Santé Inc., DRAXIS Health Inc. and DRAXIS Pharma  Inc. (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2002, filed on May 14, 2003 (SEC file  No. 000-17434))                                             |
| 4.50† |   | Manufacturing and Supply Master Agreement, dated  January 1, 2005, between Pfizer Canada Inc. and DRAXIS Pharma, a division of  DRAXIS Specialty Pharmaceuticals Inc. (incorporated herein by reference to  the Company’s Annual Report (Form 20-F) for the year ended December 31, 2005,  filed on March 31, 2006 (SEC file No. 000-17434))             |
| 4.51† |   | Amendment, dated December 20, 2005, to Employment  Agreement dated April 27, 2004, as amended between DRAXIS Health Inc. and Dan  Brazier, Chief Operating Officer of the Company (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2005, filed on March 31, 2006 (SEC file No. 000-17434)) |
| 4.52† |   | Employment Agreement, dated April 22, 2005, between  DRAXIS Health Inc. and Mr. Jean-Pierre Robert, President of DRAXIMAGE, a  division of DRAXIS Specialty Pharmaceuticals Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2005, filed on March 31, 2006 (SEC file No. 000-17434))  |
| 4.53† |   | Retirement  Compensation Arrangement Trust Agreement, dated July 8, 2005, between DRAXIS  Health Inc. and Dr. Richard Flanagan (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended December 31,  2005, filed on March 31, 2006 (SEC file No. 000-17434))                                                    |
| 4.54       |   | Charter of the Board of Directors adopted in April  2004 (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2005, filed on March 31, 2006 (SEC file  No. 000-17434))                                                                                                                          |
| 4.55       |   | Charter of the Audit Committee amended in May 2005  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2005, filed on March 31, 2006 (SEC file No.  000-17434))                                                                                                                               |
| 4.56       |   | Charter of the Human Resources and Compensation  Committee amended in May 2005 (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2005,  filed on March 31, 2006 (SEC file No. 000-17434))                                                                                                    |

 

130

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| 4.57  |   | Charter of the Nominating and Corporate Governance  Committee amended in May 2005 (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2005,  filed on March 31, 2006 (SEC file No. 000-17434)) |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.58* |   | 2006 Stock Option Plan                                                                                                                                                                                                                                        |
| 4.59* |   | Terms of reference of the Non Executive Chair                                                                                                                                                                                                                 |
| 4.60* |   | Terms of reference of the Committee Chairs                                                                                                                                                                                                                    |
| 4.61* |   | Terms of reference for the CEO                                                                                                                                                                                                                                |
| 4.62* |   | Charter of the Audit Committee as amended in  February 2007                                                                                                                                                                                                   |
| 8.1*  |   | List of Subsidiaries                                                                                                                                                                                                                                          |
| 12.1* |   | Certification of CEO required by Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                               |
| 12.2* |   | Certification of CFO required by Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                               |
| 13.1* |   | Certification of CEO required by Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                               |
| 13.2* |   | Certification of CFO required by Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                               |

----

 * Filed herewith

† Portions of theexhibits have been omitted pursuant to a confidential treatment request. Thisinformation has been filed separately with the Securities and ExchangeCommission.

 

SIGNATURES

The registrant hereby certifies that it meets all of therequirements for filing on Form 20-F and that it has duly caused and authorizedthe undersigned to sign this annual report on its behalf.

 
|                            | DRAXIS HEALTH INC. |
|----------------------------|--------------------|
|                       |               |   |
| Date:  March 30, 2007 | By:                | /S/  MARK OLEKSIW |
|                       |               | Chief Financial Officer |
|                       |               |   |
|                       | By:                | /S/  MARTIN BARKIN, M.D. |
|                       |               | President and Chief Executive Officer |

 

131

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EXHIBIT INDEX

DRAXIS HEALTH INC.

Form 20-F AnnualReport
| Exhibit No. | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        | ** ** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |
| 1.1         | ** ** | Articles of Amalgamation of DRAXIS Health Inc.  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2000, filed on June 29, 2001 (SEC file no.  000-17434))                                                                                                                                                                                                                                                                                                     |   |
| 1.2         |       | By-law No. 1 of DRAXIS Health Inc. (formerly  Deprenyl Research Limited) (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2000, filed on June  29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                                                       |   |
| 4.1         |       | Master Agreement dated November 12, 1997 among  DRAXIS Health Inc., Deprenyl Animal Health Inc. and Pfizer Inc. (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                     |   |
| 4.2         |       | License Agreement dated November 12, 1997 between  Deprenyl Animal Health Inc. and Pfizer Inc. (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended December 31,  2000, filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                                      |   |
| 4.3         |       | Letter Agreement dated December 22, 1999 between  DRAXIS Health Inc., Deprenyl Animal Health Inc. and Pfizer Inc. (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                   |   |
| 4.4         |       | Second Amendment dated December 18, 2001 to the  Master Agreement, as amended December 22, 1999, License Agreement, Research  Agreement, U.S. and Canada Manufacturing and Supply Agreement and  International Manufacturing and Supply Agreement between Pfizer Inc.,  Deprenyl Animal Health, Inc. and DRAXIS Health Inc. dated November 12, 1997  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2001, filed on May 20, 2002 (SEC file no.  000-17434)) |   |
| 4.5         |       | Amending Agreement dated March 31, 2003 between  DRAXIS Health, Inc., Elan Pharma International Limited and Elan Pharmaceuticals,  Inc. (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2002, filed on May 14, 2003 (SEC file  no. 000-17434))                                                                                                                                                                                                              |   |
| 4.6         |       | First Amendment to Subscription Agreement dated  October 24, 2002 among SGF Santé Inc., DRAXIS Health Inc. and DRAXIS Pharma  Inc. (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2002, filed on May 14, 2003 (SEC file  no. 000-17434))                                                                                                                                                                                                              |   |
| 4.7         |       | Share Purchase Agreement dated April 22, 2004  between DRAXIS Health Inc. and SGF Santé Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))                                                                                                                                                                                                                                                    |   |
| 4.8         |       | Share Purchase Agreement dated July 16, 2003  between Mohammed Barkat and Draxis Pharma Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))                                                                                                                                                                                                                                                    |   |

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| 4.9        |   | Share Purchase Agreement dated July 16, 2003  between Michel Sauvageau and DRAXIS Pharma Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))                                       |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.10       |   | Term Loan Agreement dated June 9, 1998 between  National Bank of Canada and DRAXIS Pharma Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                                          |
| 4.11       |   | Credit Agreement dated  February 18, 2000 between National Bank of Canada and DRAXIS Pharma Inc.  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2000, filed on June 29, 2001 (SEC file no.  000-17434))                                       |
| 4.12       |   | Underwriting Agreement dated April 2, 2004 between  DRAXIS Health Inc., Desjardins Securities Inc. and CIBC World Markets Inc.  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2003, filed on May 14, 2004 (SEC file no.  000-17434))          |
| 4.13† |   | Asset Purchase Agreement dated July 22, 2003 between  DRAXIS Health Inc. and Shire Biochem Inc. (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended December 31,  2003, filed on May 14, 2004 (SEC file no. 000-17434))                                          |
| 4.14       |   | Stock Option Plan of DRAXIS Health Inc., as amended,  dated June 27, 2001 (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2003, filed on May 14,  2004 (SEC file no. 000-17434))                                                                |
| 4.15       |   | DRAXIS Health Inc. Employee Stock Ownership Plan,  amended and restated, effective December 1, 1998 (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                                     |
| 4.16       |   | DRAXIS Health Inc. Employee Participation Share  Purchase Plan, effective February 16, 1995 (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended December 31,  2000, filed on June 29, 2001 (SEC file no. 000-17434))                                             |
| 4.17       |   | DRAXIS Health Inc. Deferred Share Unit Plan for  Employees (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on June 29, 2001 (SEC  file no. 000-17434))                                                                              |
| 4.18       |   | DRAXIS Health Inc. Equity Purchase Plan  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2000, filed on June 29, 2001 (SEC file no.  000-17434))                                                                                                |
| 4.19       |   | DRAXIS Retirement Savings Program (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2002, filed on May 14, 2003 (SEC file no. 000-17434))                                                                                                        |
| 4.20       |   | Shareholder Rights Plan Agreement dated April 23,  2002 between DRAXIS Health Inc. and Computershare Trust Company of Canada as  trustee (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2001, filed on May 20, 2002 (SEC  file no. 000-17434)) |
| 4.21       |   | Employment Agreement dated April 15, 1999 between  DRAXIS Health Inc. and Dr. Martin Barkin (incorporated herein by reference to  the Company’s Annual Report (Form 20-F) for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434))                                             |

133

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| 4.22 |   | Amendment dated June 14, 2000 to Employment  Agreement dated April 15, 1999 between DRAXIS Health Inc. and Dr. Martin  Barkin (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2000, filed on June 29, 2001 (SEC file  no. 000-17434))           |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.23 |   | Retirement Compensation Agreement dated September  24, 2003 between DRAXIS Health Inc. and Dr. Martin Barkin (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))                             |
| 4.24 |   | Employment Agreement dated April 27, 2004 between  DRAXIS Health Inc. and Dan Brazier (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2003,  filed on May 14, 2004 (SEC file no. 000-17434))                                                    |
| 4.25 |   | Employment Agreement dated October 18, 2000  between DRAXIS Health Inc. and Jack A. Carter (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                               |
| 4.26 |   | Amendment dated March 26, 2004 to Employment  Agreement dated October 18, 2000 between DRAXIS Health Inc. and Jack A.  Carter (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC file  no. 000-17434))  |
| 4.27 |   | Employment Agreement dated April 22, 2003  between DRAXIS PHARMA Inc. and John E.M. Durham (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))                                          |
| 4.28 |   | Amendment dated March 26, 2004 to Employment  Agreement dated April 22, 2003 between DRAXIS PHARMA Inc. and John E.M.  Durham (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC file  no. 000-17434))  |
| 4.29 |   | Employment Agreement dated October 17, 2003  between DRAXIS Health Inc. and Alida Gualtieri (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))                                         |
| 4.30 |   | Amendment dated March 26, 2004 to Employment  Agreement dated October 17, 2003 between DRAXIS Health Inc. and Alida  Gualtieri (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC  file no. 000-17434)) |
| 4.31 |   | Employment Agreement dated March 9, 2004  between DRAXIS Health Inc. and Chien Huang (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended December 31,  2003, filed on May 14, 2004 (SEC file no. 000-17434))                                                |
| 4.32 |   | Employment Agreement dated March 9, 2004  between DRAXIS Health Inc. and Mark Oleksiw (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended December 31,  2003, filed on May 14, 2004 (SEC file no. 000-17434))                                               |
| 4.33 |   | Employment Agreement dated May 14, 2001 between  DRAXIS Health Inc. and Jerry Ormiston (incorporated herein by reference to  the Company’s Annual Report (Form 20-F) for the year ended December 31, 2001,  filed on May 20, 2002 (SEC file no. 000-17434))                                                   |

134

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| 4.34       |   | Amendment dated March 26, 2004 to Employment  Agreement dated May 14, 2001 between DRAXIS Health Inc. and Jerry  Ormiston (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC  file no. 000-17434))                                                                                                                                                 |
|------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.35       |   | Employment Agreement dated October 1, 1997 between  DRAXIS Health Inc. and Dr. Richard J. Flanagan (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))                                                                                                                                                                                  |
| 4.36       |   | Amendment dated July 23, 2001 to Employment  Agreement dated October 1, 1997 between DRAXIS Health Inc. and Dr. Richard J.  Flanagan (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2003, filed on May 14, 2004 (SEC file  no. 000-17434))                                                                                                                                                |
| 4.37† |   | Non Exclusive Distribution Agreement dated October  25, 1995 between Frosst Radiopharmaceuticals, a division of Merck Frosst  Canada Inc. (now known as DRAXIMAGE) and Syncor International Corporation  (now known as Cardinal Health 414, Inc.) (incorporated herein by reference to  the Company’s Annual Report (Form 20-F) for the year ended December 31, 2004,  filed on March 31, 2005 (SEC file no. 000-17434))                                 |
| 4.38† |   | Non Exclusive Distribution Agreement dated July 12,  2000 between DRAXIMAGE and Syncor International (now known as Cardinal Health  414, Inc.) (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2004, filed on March 31, 2005  (SEC file no. 000-17434))                                                                                                                                    |
| 4.39† |   | Amendment dated August 6, 2003 to Non Exclusive  Distribution Agreement dated July 12, 2000 between DRAXIMAGE and Syncor  International (now known as Cardinal Health 414, Inc.) (incorporated herein  by reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2004, filed on March 31, 2005 (SEC file no. 000-17434))                                                                                                  |
| 4.40† |   | Manufacturing and Supply Agreement dated July 1,  1999 between Warner-Lambert Canada Inc. (now known as Pfizer Consumer  Healthcare, a Division of Pfizer Canada Inc.) and DRAXIS Pharma Inc. (now  known as DRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.)  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2004, filed on March 31, 2005 (SEC file no.  000-17434)) |
| 4.41† |   | Supply Agreement dated December 18, 2001 between  GlaxoSmithKline Inc. and DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a  division of DRAXIS Specialty Pharmaceuticals Inc.) (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2004, filed on March 31, 2005 (SEC file no. 000-17434))                                                                                                  |
| 4.42† |   | Manufacture and Supply Agreement entered into  between DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a division of DRAXIS  Specialty Pharmaceuticals Inc.) and Bone Care International, Inc. on March 3,  2003 (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2004, filed on March 31, 2005 (SEC file  no. 000-17434))                                                                  |
| 4.43       |   | Amendment dated August 25, 2004 to Employment  Agreement dated April 27, 2004 between DRAXIS Health Inc. and Dan Brazier  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2004, filed on March 31, 2005 (SEC file no.  000-17434))                                                                                                                                                         |

135

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| 4.44       |   | Amended and Restated Loan Agreement dated June 10,  2004 between DRAXIS Health Inc. and National Bank of Canada (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2004, filed on March 31, 2005 (SEC file no. 000-17434))                                                                   |
|------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.45       |   | Amendment dated June 23, 2004 to Employment  Agreement dated April 15, 1999 between DRAXIS Health Inc. and Martin Barkin  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2004, filed on March 31, 2005 (SEC file no.  000-17434))                                                         |
| 4.46       |   | Amendment to Credit Facilities for DRAXIS Pharma  Inc. dated March 28, 2002 between National Bank of Canada and DRAXIS Pharma  Inc. (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2001, filed on May 20, 2002 (SEC file  No. 000-17434))                                                 |
| 4.47       |   | Loan Agreement dated March 28, 2002 among DRAXIS  Pharma Inc., SGF Santé Inc. and DRAXIS Health Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2001, filed on May 20, 2002 (SEC file No. 000-17434))                                                                           |
| 4.48       |   | Loan Agreement dated March 28, 2002 among DRAXIS  Pharma Inc., Investissement Québec and DRAXIS Health Inc. (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2001, filed on May 20, 2002 (SEC file No. 000-17434))                                                                    |
| 4.49       |   | First Amendment to Subscription Agreement dated  October 24, 2002 among SGF Santé Inc., DRAXIS Health Inc. and DRAXIS Pharma  Inc. (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2002, filed on May 14, 2003 (SEC file  No. 000-17434))                                             |
| 4.50† |   | Manufacturing and Supply Master Agreement, dated  January 1, 2005, between Pfizer Canada Inc. and DRAXIS Pharma, a division of  DRAXIS Specialty Pharmaceuticals Inc. (incorporated herein by reference to  the Company’s Annual Report (Form 20-F) for the year ended December 31, 2005,  filed on March 31, 2006 (SEC file No. 000-17434))             |
| 4.51† |   | Amendment, dated December 20, 2005, to Employment  Agreement dated April 27, 2004, as amended between DRAXIS Health Inc. and Dan  Brazier, Chief Operating Officer of the Company (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2005, filed on March 31, 2006 (SEC file No. 000-17434)) |
| 4.52† |   | Employment Agreement, dated April 22, 2005, between  DRAXIS Health Inc. and Mr. Jean-Pierre Robert, President of DRAXIMAGE, a  division of DRAXIS Specialty Pharmaceuticals Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2005, filed on March 31, 2006 (SEC file No. 000-17434))  |
| 4.53† |   | Retirement  Compensation Arrangement Trust Agreement, dated July 8, 2005, between DRAXIS  Health Inc. and Dr. Richard Flanagan (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended December 31,  2005, filed on March 31, 2006 (SEC file No. 000-17434))                                                    |
| 4.54       |   | Charter of the Board of Directors adopted in April  2004 (incorporated herein by reference to the Company’s Annual Report (Form  20-F) for the year ended December 31, 2005, filed on March 31, 2006 (SEC file  No. 000-17434))                                                                                                                          |
| 4.55       |   | Charter of the Audit Committee amended in May 2005  (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2005, filed on March 31, 2006 (SEC file No.  000-17434))                                                                                                                               |

136

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| 4.56  |   | Charter of the Human Resources and Compensation  Committee amended in May 2005 (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2005,  filed on March 31, 2006 (SEC file No. 000-17434))    |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.57  |   | Charter of the Nominating and Corporate Governance  Committee amended in May 2005 (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31, 2005,  filed on March 31, 2006 (SEC file No. 000-17434)) |
| 4.58* |   | 2006 Stock Option Plan                                                                                                                                                                                                                                        |
| 4.59* |   | Terms of reference of the Non Executive Chair                                                                                                                                                                                                                 |
| 4.60* |   | Terms of reference of the Committee Chairs                                                                                                                                                                                                                    |
| 4.61* |   | Terms of reference for the CEO                                                                                                                                                                                                                                |
| 4.62* |   | Charter of the Audit Committee as amended in  February 2007                                                                                                                                                                                                   |
| 8.1*  |   | List of Subsidiaries                                                                                                                                                                                                                                          |
| 12.1* |   | Certification of CEO required by Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                               |
| 12.2* |   | Certification of CFO required by Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                               |
| 13.1* |   | Certification of CEO required by Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                               |
| 13.2* |   | Certification of CFO required by Section 906 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                                               |

 

----

* Filed herewith

† Portions of theexhibits have been omitted pursuant to a confidential treatment request. Thisinformation has been filed separately with the Securities and ExchangeCommission.

 

 

137

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#### **MANAGEMENT’SREPORT**

TheCompany’s management is responsible for preparing the accompanying ConsolidatedFinancial Statements in conformity with U.S. generally accepted accountingprinciples (“GAAP”). In preparing these Consolidated Financial Statements, managementselects accounting policies and uses its judgment and best estimates, asappropriate in the circumstances. Management has determined such amounts on areasonable basis in order to ensure that the financial statements are presentedfairly, in all material respects.

TheCompany maintains a system of internal accounting controls designed to providereasonable assurance, at a reasonable cost, that assets are safeguarded andthat transactions are executed and recorded in accordance with the Company’s policies.This system is supported by policies and procedures for key businessactivities, by the hiring of qualified staff and by a continuous planning andmonitoring program.

Deloitte& Touche LLP has been engaged by the Company’s shareholders to audit theConsolidated Financial Statements. During the course of their audit, Deloitte& Touche LLP considered the Company’s system of internal controls to theextent necessary to render their opinion on the Consolidated FinancialStatements; however, they were not engaged to, nor do they, express any opinionregarding the effectiveness of the Company’s system of internal controls overfinancial reporting.

TheBoard of Directors is responsible for ensuring that management fulfills itsresponsibility for financial reporting and is ultimately responsible forreviewing and approving the financial statements. The Board carries out theresponsibility principally through its Audit Committee. The members of theAudit Committee are outside directors. The Committee considers, for review bythe Board of Directors and approval by the shareholders, the engagement orreappointment of the external auditors. Deloitte & Touche LLP has full andfree access to the Audit Committee.

Managementacknowledges its responsibility to provide financial information that isrepresentative of the Company’s operations, is consistent and reliable, and isrelevant for the informed evaluation of the Company’s activities.
| (signed)                              |   | (signed)                |
|---------------------------------------|--------|-------------------------|
|                                  |   |                    |
|                                  |   |                    |
|                                  |   |                    |
| MARTIN BARKIN, MD                     |   | MARK OLEKSIW, CA        |
|                                  |   |                    |
| President and Chief Executive Officer |   | Chief Financial Officer |
|                                  |   |                    |
| Mississauga, Ontario                  |   |                    |
|                                  |   |                    |
| February 23, 2007                     |   |                    |

 

F-1

----

**REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS**

Tothe Shareholders and Board of Directors of DRAXIS Health Inc.

Wehave audited the consolidated balance sheets of DRAXIS Health Inc. as atDecember 31, 2006 and 2005, and the consolidated statements of operations,changes in equity and comprehensive income, and cash flows for each of theyears in the three-year period ended December 31, 2006. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

Weconducted our audits in accordance with Canadian generally accepted auditingstandards and the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform an audit toobtain reasonable assurance whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

Inour opinion, these Consolidated Financial Statements present fairly, in allmaterial respects, the financial position of the Company as at December 31,2006 and 2005, and the results of its operations and its cash flows for each ofthe years in the three-year period ended December 31, 2006, in accordance withaccounting principles generally accepted in the United States of America.

TheCompany is not required to have, nor were we engaged to perform, an audit ofits internal controls over financial reporting. Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal controls over financial reporting. Accordingly we express no suchopinion.
| (signed)                                     |
|----------------------------------------------|
|                                         |
| DELOITTE & TOUCHE LLP                    |
|                                         |
| Independent Registered Chartered Accountants |
|                                         |
| Montreal, Quebec                             |
|                                         |
| February 23, 2007                            |

 

**COMMENTSBY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS ON CANADA-UNITED STATES OFAMERICA REPORTING DIFFERENCES**

The standards of thePublic Company Accounting Oversight Board (United States) require the addition of an explanatory paragraph(following the opinion paragraph) when there are changes in accountingprinciples that have a material effect on the comparability of the Company’sfinancial statements, such as the change described in Note 3 to the financialstatements.  Our report to theShareholders and  Board of Directors,dated February 23, 2007, is expressed in accordance with Canadian reportingstandards which do not require a reference to such changes in accountingprinciples in the auditors’ report when the change is properly accounted forand adequately disclosed in the financial statements.

F-2

----

 
| (signed)                                     |
|----------------------------------------------|
|                                         |
| DELOITTE & TOUCHE LLP                    |
|                                         |
| Independent Registered Chartered Accountants |
|                                         |
| Montreal, Quebec                             |
|                                         |
| February 23, 2007                            |
|                                         |

F-3

----

 
| **Consolidated Statements of Operations**                    |
|--------------------------------------------------------------|
| *(in thousands of U.S. dollars, except share  related data)* |

 
| **Years ended December 31**                   | ** **   | **2006**     | ** ** | **2005**   | ** ** | **2004** | ** ** |
|--------------------------------------------------------------|--------------|--------------|------------|------------|------------|----------|------------|
| ***REVENUES***                                               | *** *** | *** *** | ** ** | ** ** | * *   | * * |       |
| Product sales                                                | ** **   | **$**        | **83,545** |       | $          | 72,989   |       | $ | 61,693 |   |
| Royalty and licensing (Note 13)                              |         | **5,422**    | ** ** | 6,444      |       | 7,627    |       |
| *** ***                                                 | ** **   | **88,967**   |       | 79,433     |       | 69,320   |       |
| ***EXPENSES***                                               |         |         | ** ** | ** ** |       |     |       |
| Cost of goods sold, excluding  depreciation and amortization |         | **47,083**   | ** ** | 46,836     |       | 39,793   |       |
| Selling, general and administration                          |         | **19,425**   | ** ** | 16,185     |       | 13,266   |       |
| Research and development                                     |         | **2,372**    | ** ** | 2,103      |       | 1,948    |       |
| Depreciation and amortization                                |         | **5,135**    | ** ** | 4,545      |       | 4,457    |       |
| ** **                                                   | ** **   | **74,015**   |       | 69,669     |       | 59,464   |       |
| Operating income                                             |         | **14,952**   | ** ** | 9,764      |       | 9,856    |       |
| Financial income  (expense), net (Note 4)                    |         | **347**      | ** ** | (29        | )          | (296     | )          |
| Foreign exchange  gain (loss)                                |         | **282**      | ** ** | (398       | )          | (374     | )          |
| Other income                                                 | ** **   | **—**   |       | —     |       | 96       |       |
| Income before  undernoted                                    | ** **   | **15,581**   |       | 9,337      |       | 9,282    |       |
| Income taxes  (Note 5)                                       |         | **(4,034**   | **)**      | (1,553     | )          | (1,301   | )          |
| Minority  interest                                           |         | **—**   | ** ** | —     |       | (4       | )          |
| Income from  continuing operations                           | ** **   | **11,547**   |       | 7,784      |       | 7,977    |       |
| Loss from  discontinued operations, net of taxes             |         | **—**   | ** ** | —     |       | (61      | )          |
| Net income                                                   | ** **   | **$**        | **11,547** |       | $          | 7,784    |       | $ | 7,916 |   |
|                                                         |         |         | ** ** | ** ** |       |     |       |
| Basic income per  share (Note 6)                             |         |         | ** ** | ** ** |       |     |       |
| from continuing operations                                   | ** **   | **$**        | **0.28**   |       | $          | 0.19     |       | $ | 0.20 |   |
| from discontinued operations                                 |         | **—**   | ** ** | —     |       | —   |       |
|                                                         | ** **   | **$**        | **0.28**   |       | $          | 0.19     |       | $ | 0.20 |   |
|                                                         |         |         | ** ** | ** ** |       |     |       |
| Diluted income  per share (Note 6)                           |         |         | ** ** | ** ** |       |     |       |
| from continuing operations                                   | ** **   | **$**        | **0.28**   |       | $          | 0.18     |       | $ | 0.19 |   |
| from discontinued operations                                 | ** **   | **—**   | ** ** | —     |       | —   |       |
|                                                         | ** **   | **$**        | **0.28**   |       | $          | 0.18     |       | $ | 0.19 |   |

 

See the accompanying notes to theConsolidated Financial Statements
| Approved by the Board |   |              |
|-----------------------|--------|-------------------|
|                  |   |              |
|                  |   |              |
|                  |   |              |
| (signed)              |   | (signed)          |
|                  |   |              |
| BRIAN KING            |   | MARTIN BARKIN, MD |
| Director              |   | Director          |

F-4

----

 
| **Consolidated Balance Sheets**          |
|--------------------------------------------------------------|
| *(in  thousands of U.S. dollars, except share related data)* |

 
| **As at December 31**                                                                                                                                     | ** ** | **2006**   | ** **  | **2005**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|-------------|------------|------------|
| **ASSETS**                                                                                                                                                               |       |       | ** **  | ** ** |       |
| **Current assets**                                                                                                                                                       |       |       | ** **  | ** ** |       |
| Cash and cash  equivalents                                                                                                                                               | ** ** | **$**      | **21,446**  |       | $          | 12,390 |   |
| Accounts  receivable (Note 8)                                                                                                                                            |       | **20,683** | ** **  | 16,301     |       |
| Inventories  (Note 9)                                                                                                                                                    |       | **7,590**  | ** **  | 7,629      |       |
| Prepaid expenses                                                                                                                                                         |       | **735**    | ** **  | 1,003      |       |
| Deferred income  taxes, net (Note 5)                                                                                                                                     | ** ** | **3,179**  |        | 2,750      |       |
| Total current assets                                                                                                                                                     |       | **53,633** | ** **  | 40,073     |       |
|                                                                                                                                                                     |       | ** ** | ** **  | ** ** |       |
| Property, plant and  equipment, net (Note 10)                                                                                                                            |       | **46,292** | ** **  | 45,652     |       |
| Goodwill                                                                                                                                                                 |       | **753**    | ** **  | 754        |       |
| Intangible assets, net  (Note 11)                                                                                                                                        |       | **318**    | ** **  | 399        |       |
| Other assets                                                                                                                                                             |       | **407**    | ** **  | 475        |       |
| Deferred income taxes,  net (Note 5)                                                                                                                                     | ** ** | **4,559**  |        | 8,467      |       |
| Total assets                                                                                                                                                             | ** ** | **$**      | **105,962** |       | $          | 95,820 |   |
|                                                                                                                                                                     |       |       | ** **  | ** ** |       |
| **LIABILITIES**                                                                                                                                                          |       |       | ** **  | ** ** |       |
| **Current liabilities**                                                                                                                                                  |       |       | ** **  | ** ** |       |
| Accounts payable  and accrued liabilities (Note 12)                                                                                                                      | ** ** | **$**      | **10,940**  |       | $          | 8,737 |   |
| Current portion  of deferred revenues (Note 13)                                                                                                                          |       | **329**    | ** **  | 3,671      |       |
| Customer  deposits                                                                                                                                                       | ** ** | **576**    |        | 649        |       |
| Total current  liabilities                                                                                                                                               |       | **11,845** | ** **  | 13,057     |       |
|                                                                                                                                                                     |       |       | ** **  | ** ** |       |
| Other liabilities (Note  15)                                                                                                                                             |       | **990**    | ** **  | 308        |       |
| Deferred revenues (Note  13)                                                                                                                                             |       | **712**    | ** **  | 827        |       |
| Total liabilities                                                                                                                                                        | ** ** | **13,547** |        | 14,192     |       |
|                                                                                                                                                                     | ** ** | ** ** | ** **  | ** ** |       |
| Commitments and  contingencies (Note 20)                                                                                                                                 |       |       | ** **  | ** ** |       |
| * *                                                                                                                                                                 |       |       | ** **  | ** ** |       |
| **SHAREHOLDERS’ EQUITY**                                                                                                                                            |       |       | ** **  | ** ** |       |
| Common stock, without  par value of unlimited number of shares authorized, 41,522,138 and 41,588,005  issued and outstanding at December 31, 2006 and 2005, respectively | ** ** | **77,749** | ** **  | 77,313     |       |
| Additional paid-in  capital                                                                                                                                              |       | **15,475** | ** **  | 15,370     |       |
| Warrants (Note 17(a))                                                                                                                                                    |       | **—** | ** **  | 916        |       |
| Deficit                                                                                                                                                                  |       | **(8,234** | **)**       | (19,781    | )          |
| Accumulated other  comprehensive income                                                                                                                                  | ** ** | **7,425**  |        | 7,810      |       |
| Total shareholders’  equity                                                                                                                                         | ** ** | **92,415** |        | 81,628     |       |
| Total liabilities and shareholders’ equity                                                                                                                          | ** ** | **$**      | **105,962** |       | $          | 95,820 |   |

 

See the accompanying notes to theConsolidated Financial Statements

F-5

----

 
| **Consolidated Statements of Changes in Equity and  Comprehensive Income**    |
|-----------------------------------------------------------------------------------------|
| *(in  thousands of U.S. dollars, except share related data)*                            |

 
| **Years ended December 31**             | ** ** | **2006**       | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|
| **Common Stock (Number of Shares)**                    | ** ** | ** **     |       |       |       |       |       |
| Balance, beginning of  year                            |       | **41,588,005** |       | 41,015,326 |       | 37,297,817 |       |
| Issuance of  common shares                             |       | **—**     |       | —     |       | 3,053,436  |       |
| Exercise of  options                                   |       | **647,333**    |       | 648,279    |       | 609,177    |       |
| Exercise of  employee participation shares             |       | **—**     |       | —     |       | 54,896     |       |
| Repurchased for  cancellation                          |       | **(713,200**   | **)**      | (75,600    | )          | —     |       |
| Balance, end of year                                   | ** ** | **41,522,138** |       | 41,588,005 |       | 41,015,326 |       |
| **Common Stock**                                       | ** ** | ** **     |       |       |       |       |       |
| Balance, beginning of  year                            | ** ** | **$**          | **77,313** |       | $          | 75,840     |       | $ | 61,175 |   |
| Issuance of  common shares                             |       | **—**     |       | —     |       | 12,867     |       |
| Exercise of  options                                   |       | **1,934**      |       | 1,628      |       | 1,594      |       |
| Exercise of  employee participation shares             |       | **—**     |       | —     |       | 204        |       |
| Repurchased for  cancellation                          |       | **(1,498**     | **)**      | (155       | )          | —     |       |
| Balance, end of year                                   | ** ** | **77,749**     |       | 77,313     |       | 75,840     |       |
| **Additional Paid-In Capital**                         | ** ** | ** **     |       |       |       |       |       |
| Balance, beginning of  year                            | ** ** | **15,370**     |       | 15,546     |       | 15,667     |       |
| Stock-based  compensation (Note 3)                     |       | **968**        |       | —     |       | —     |       |
| Expired warrants                                       |       | **916**        |       | —     |       | —     |       |
| Exercise of  employee participation shares             |       | **—**     |       | —     |       | (121       | )          |
| Common shares  purchased for cancellation (Note 17(b)) | ** ** | **(1,779**     | **)**      | (176       | )          | —     |       |
| Balance, end of year                                   | ** ** | **15,475**     |       | 15,370     |       | 15,546     |       |
| **Warrants**                                           | ** ** | ** **     |       |       |       |       |       |
| Balance, beginning of  year                            | ** ** | **916**        |       | 916        |       | —     |       |
| Issuance of  warrants                                  |       | **—**     |       | —     |       | 916        |       |
| Expiry of  warrants (Note 17(a))                       |       | **(916**       | **)**      | —     |       | —     |       |
| Balance, end of year                                   | ** ** | **—**     |       | 916        |       | 916        |       |
| **Employee Participation Shares**                      | ** ** | ** **     |       |       |       |       |       |
| Balance, beginning of  year                            | ** ** | **—**     |       | —     |       | 86         |       |
| Exercise of  employee participation shares             |       | **—**     |       | —     |       | (86        | )          |
| Balance, end of year                                   | ** ** | **—**     |       | —     |       | —     |       |
| **Employee Participation  Shares-Loans Receivable**    | ** ** | ** **     |       |       |       |       |       |
| Balance, beginning of  year                            | ** ** | **—**     |       | —     |       | (86        | )          |
| Exercise of  employee participation shares             |       | **—**     |       | —     |       | 86         |       |
| Balance, end of year                                   | ** ** | **—**     |       | —     |       | —     |       |
| **Deficit**                                            | ** ** | ** **     |       |       |       |       |       |
| Balance, beginning of  year                            | ** ** | **(19,781**    | **)**      | (27,565    | )          | (35,481    | )          |
| Net income                                             |       | **11,547**     |       | 7,784      |       | 7,916      |       |
| Balance, end of year                                   | ** ** | **(8,234**     | **)**      | (19,781    | )          | (27,565    | )          |
| **Accumulated Other Comprehensive  Income (Loss)**     | ** ** | ** **     |       |       |       |       |       |
| Balance, beginning of  year                            | ** ** | **7,810**      |       | 5,183      |       | 286        |       |
| Other  comprehensive (loss) income                     | ** ** | **(385**       | **)**      | 2,627      |       | 4,897      |       |
| Balance, end of year                                   | ** ** | **7,425**      |       | 7,810      |       | 5,183      |       |
| **Total  shareholders’ equity**                   | ** ** | **$**          | **92,415** |       | $          | 81,628     |       | $ | 69,920 |   |
| **Comprehensive Income**                               | ** ** | ** **     | ** ** | ** ** |       |       |       |
| Foreign currency  translation adjustments              | ** ** | **$**          | **(385**   | **)**      | $          | 2,627      |       | $ | 4,897 |   |
| Other comprehensive  (loss) income                     |       | **(385**       | **)**      | 2,627      |       | 4,897      |       |
| Net income                                             |       | **11,547**     |       | 7,784      |       | 7,916      |       |
| **Total comprehensive income**                         | ** ** | **$**          | **11,162** |       | $          | 10,411     |       | $ | 12,813 |   |

 

See the accompanying notes to theConsolidated Financial Statements

F-6

----

 
| **Consolidated Statements of Cash Flows** |
|-------------------------------------------|
| *(in  thousands of U.S. dollars)*         |

 
| **Years ended December 31**                                                                       | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| ***CASH  FLOWS FROM (USED IN) OPERATING ACTIVITIES***                                                            |       | ** ** |       |     |       |     |       |
| Net income from  continuing operations                                                                           | ** ** | **$**      | **11,547** |     | $          | 7,784    |       | $ | 7,977 |   |
| Adjustments to  reconcile net income from continuing operations to net cash from (used in)  operating activities |       | ** ** |       |     |       |     |       |
| Amortization of  deferred revenues                                                                               |       | **(3,301** | **)**      | (3,701   | )          | (5,495   | )          |
| Depreciation and  amortization                                                                                   |       | **5,135**  |       | 4,545    |       | 4,457    |       |
| Stock-based  compensation (Note 3)                                                                               |       | **968**    |       | —   |       | —   |       |
| Deferred income  taxes                                                                                           |       | **3,227**  |       | 765      |       | 322      |       |
| Foreign exchange                                                                                                 |       | **(282**   | **)**      | 398      |       | 374      |       |
| Minority  interest                                                                                               |       | **—** |       | —   |       | 4        |       |
| Other                                                                                                            |       | **662**    |       | 261      |       | 492      |       |
| Changes in operating  assets and liabilities                                                                     |       | ** ** |       |     |       |     |       |
| Accounts  receivable                                                                                             |       | **(4,615** | **)**      | (1,903   | )          | (2,849   | )          |
| Inventories                                                                                                      |       | **44**     |       | 2,786    |       | (3,230   | )          |
| Prepaid expenses                                                                                                 |       | **279**    |       | (263     | )          | (409     | )          |
| Accounts payable  and accrued liabilities                                                                        |       | **2,280**  |       | (1,648   | )          | 3,124    |       |
| Other  liabilities                                                                                               |       | **682**    |       | 308      |       | —   |       |
| Current portion  of deferred revenues                                                                            |       | **(176**   | **)**      | 385      |       | 362      |       |
| Net cash from (used in)  operating activities of continuing operations                                           | ** ** | **16,450** |       | 9,717    |       | 5,129    |       |
| ***CASH  FLOWS (USED IN) FROM INVESTING ACTIVITIES***                                                            |       | ** ** |       |     |       |     |       |
| Expenditures for  property, plant and equipment                                                                  | ** ** | **(5,656** | **)**      | (4,619   | )          | (4,801   | )          |
| Increase in  intangible assets                                                                                   | ** ** | **(359**   | **)**      | (185     | )          | (150     | )          |
| Proceeds from  disposition of equipment                                                                          | ** ** | **22**     |       | —   |       | —   |       |
| Proceeds from  disposition of product right                                                                      | ** ** | **—** |       | —   |       | 113      |       |
| Restricted cash  (Note 7)                                                                                        |       | **—** |       | 424      |       | 548      |       |
| Net cash from (used in)  investing activities of continuing operations                                           | ** ** | **(5,993** | **)**      | (4,380   | )          | (4,290   | )          |
| ***CASH  FLOWS (USED IN) FROM FINANCING ACTIVITIES***                                                            |       | ** ** |       |     |       |     |       |
| Proceeds from  long-term debt                                                                                    |       | **—** |       | —   |       | 4,965    |       |
| Repayment of  long-term debt                                                                                     |       | **—** |       | —   |       | (15,508  | )          |
| Decrease in  customer deposits, net                                                                              |       | **(73**    | **)**      | (2       | )          | (8       | )          |
| Exercise of  options                                                                                             |       | **1,934**  |       | 1,628    |       | 1,594    |       |
| Issuance of  common shares and warrants, net of related expenses (Note 17(a))                                    | ** ** | —     |       | —   |       | 13,385   |       |
| Common shares  purchased for cancellation                                                                        |       | **(3,277** | **)**      | (331     | )          | —   |       |
| Repurchase of  common shares by subsidiary from minority interest (Note 16)                                      | ** ** | **—** |       | —   |       | (9,557   | )          |
| Net cash from (used in)  financing activities of continuing operations                                           | ** ** | **(1,416** | **)**      | 1,295    |       | (5,129   | )          |
| Effect of  foreign exchange rate changes on cash and cash equivalents                                            | ** ** | **15**     |       | (168     | )          | (255     | )          |
| Net cash from  (used in) continuing operations                                                                   | ** ** | **9,056**  |       | 6,464    |       | (4,545   | )          |
| ***CASH  FLOWS OF DISCONTINUED OPERATIONS***                                                                     | ** ** | ** ** | ** ** |     |       |     |       |
| Operating cash  flows                                                                                            | ** ** | **—** | ** ** | —   |       | (92      | )          |
| Net cash from (used in)  discontinued operations                                                                 | ** ** | **—** |       | —   |       | (92      | )          |
| Net increase  (decrease) in cash and cash equivalents                                                            | ** ** | **9,056**  |       | 6,464    |       | (4,637   | )          |
| Cash and cash  equivalents, beginning of period                                                                  | ** ** | **12,390** |       | 5,926    |       | 10,563   |       |
| Cash and cash  equivalents, end of period                                                                        | ** ** | **$**      | **21,446** |     | $          | 12,390   |       | $ | 5,926 |   |
|                                                                                                             |       | ** ** |       |     |       |     |       |
| **Additional Information**                                                                                       |       | ** ** |       |     |       |     |       |
| Interest paid                                                                                                    | ** ** | **$**      | **—** |     | $          | —   |       | $ | 310 |   |
| Income taxes paid                                                                                                | ** ** | **$**      | **561**    |     | $          | 804      |       | $ | 1,040 |   |

 

See the accompanying notes to theConsolidated Financial Statements

 

F-7

----

**NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS**

Forthe years ended December 31, 2006, 2005 and 2004

*(in thousands of U.S. dollars,except share related data)*

# **1.****                                      NATUREOF OPERATIONS**

DRAXISHealth Inc. (“DRAXIS” or the “Company”) is a specialty pharmaceutical companyproviding pharmaceutical products in three major categories: sterile, includingsterile lyophilized (freeze-dried) pharmaceuticals; non-sterile specialtypharmaceuticals; and radiopharmaceuticals. In the radiopharmaceutical category,DRAXIS has its own products and a targeted research and development (“R&D”)program for new and/or improved products. As of January 1, 2005, activities ofthe Company are carried out principally through its wholly owned subsidiary,DRAXIS Specialty Pharmaceuticals Inc., which operates two major divisions,DRAXIS Pharma (contract manufacturing) and DRAXIMAGE (radiopharmaceuticals).The Company’s common shares are listed on NASDAQ and the Toronto Stock Exchange(“TSX”).

# **2.****                                      SIGNIFICANTACCOUNTING POLICIES**

## ***(a)******                                             Basisof Presentation***

 

TheCompany has prepared these Consolidated Financial Statements in U.S. dollarsand in accordance with generally accepted accounting principles (“GAAP”) in theU.S.

## ***(b)******                                 Principlesof Consolidation***

 

TheConsolidated Financial Statements include the accounts of the Company and itssubsidiary companies with provision for minority interests. The Company’seffective interest in the voting equity share capital of its subsidiaries is100%, except in the case of DRAXIS Pharma, for which it was 67.3% prior toApril 22, 2004 and 100% thereafter. All intercompany transactions and balancesare eliminated on consolidation.

## ***(c)******                                  MinorityInterest***

 

Minorityinterest represents the minority shareholders’ proportionate share of equityand net income or loss of DRAXIS Pharma prior to April 22, 2004, the date onwhich the Company acquired the remaining minority interest. See Note 16.

## ***(d)******                                 Useof Estimates***

 

Thepreparation of the Company’s Consolidated Financial Statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosures of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates. Significant estimates and assumptions are required whenaccounting for items and matters such as asset impairments, allowance foruncollectible accounts receivable, inventory obsolescence, warranties andprovisions, amortization, deferred and current income taxes, stock compensationand contingencies.

## ***(e)******                                  ReportingCurrency and Foreign Currency Translation***

 

TheCompany’s principal functional currency is the Canadian dollar; however, itreports its Consolidated Financial Statements in U.S. dollars. The financialstatements of the parent 

F-8

----

companyand its non-U.S. subsidiaries whose functional currency is not the U.S. dollarare translated into U.S. dollars in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 52, *ForeignCurrency Translation*. Assetand liability accounts are translated at the rate of exchange prevailing at thebalance sheet date. Shareholders’ equity accounts are translated at theapplicable historical rate. Revenue and expense accounts are translated at theaverage rate of exchange for the period. The cumulative foreign currencytranslation adjustment is reported as a component of accumulated othercomprehensive income in shareholders’ equity. The net change in the cumulativeforeign currency translation adjustment in the periods presented is primarilydue to fluctuations in the exchange rates between the Company’s reportingcurrency and the Canadian dollar.

Foreigndenominated monetary assets and liabilities of the Company are translated atthe exchange rates in effect at the balance sheet dates. Revenues and expensesare translated at average rates for the period. Resulting translation gains orlosses are reflected in net income.

## ***(f)******                                    RevenueRecognition***

### **Product Sales**

TheCompany recognizes revenue, net of trade discounts and allowances, whenevidence of an arrangement exists, delivery has occurred or services have beenrendered, the price is fixed or determinable and collectability is reasonablyassured. Sales incentives are recorded as a reduction of revenues at the timethe related revenues are recorded. Delivery has occurred when goods are shippedand title has passed.

Amountsreceived from customers as prepayments for products to be shipped or servicesto be provided in the future are reported as customer deposits and recognizedas revenue when delivery has occurred or services have been rendered.

Productsales include related service revenues that are recognized at the time ofperformance or proportionately over the term of the contract, as appropriate.

### **Royalty and Licensing**

Royaltyrevenue is recognized on an accrual basis in accordance with contractualagreements when all significant contractual obligations have been satisfied,the amounts are determinable and collection is reasonably assured. Royaltyrevenue is net of amounts owing to sublicensees where the Company is acting asan agent for the sublicensee.

Licenseand other forms of non-refundable fees received pursuant to collaborationagreements are accounted for according to the related contractual agreements.In general, such fees are deferred and recognized on a straight-line basis overthe contract period. Where the contract period is not defined, such fees arerecognized on a straight-line basis over the estimated term, during whichcontractual benefits are expected to be derived. If payment of such fees iscontingent upon future performance obligations of the Company or other futureevents, revenue recognition of such amounts is deferred and recognized uponcompletion of the specific event.

## ***(g)******                                 Researchand Development***

Inaccordance with SFAS No. 2, Accountingfor Research and Development Costs, R&D costs are expensed in theperiod in which they are incurred. Acquired R&D having no alternativefuture use is written off at the time of acquisition. The cost of intangiblesthat are purchased from others for a particular R&D project that have noalternative future use is written off at the time of acquisition.

F-9

----

## ***(h)******                                 IncomeTaxes***

Theliability method of accounting for income taxes is used in accordance with SFASNo. 109, Accounting for Income Taxes.Under this method, deferred tax assets and liabilities are recognized for thedifferences between the financial statement and income tax bases of assets andliabilities, and for operating losses and tax credit carryforwards. A valuationallowance is provided for the portion of deferred tax assets that is morelikely than not to be unrealized. Deferred tax assets and liabilities aremeasured using the enacted tax rates and laws.

TheCanadian Federal and Quebec Provincial governments offer a tax incentive tocompanies performing R&D activities in Canada. The federal tax incentive iscalculated based on predetermined rates, considers eligible R&Dexpenditures and can be used to reduce federal income taxes in Canada otherwisepayable. Such credits, if not used in the year earned, can be carried forwardfor a period of 20 years. The Quebec Provincial government offers a similarincentive, except that it is receivable in cash instead of a credit used toreduce taxes otherwise payable. The cash credit is awarded regardless ofwhether or not there are Quebec Provincial taxes payable. These tax credits arerecorded as a reduction of the income tax expense.

## ***(i)******                                    Cashand Cash Equivalents***

Allhighly liquid investments with original maturities of three months or less areclassified as cash and cash equivalents. The fair value of cash and cashequivalents approximates the amounts shown in the financial statements.

## ***(j)******                                    Allowancefor Doubtful Accounts***

TheCompany determines an appropriate allowance for doubtful accounts based on anaccount-by-account review as opposed to a general provision assessed as apercentage of revenues.

## ***(k)******                                 Inventories***

Inventoriescomprise raw materials, work-in-process and finished goods. Raw materials arevalued at the lower of standard cost and replacement cost. Standard costapproximates actual cost, computed on a first-in, first-out basis.Work-in-process is valued at the lower of standard cost and net realizablevalue and includes material, direct labor and related manufacturing overheadcosts. Finished goods are valued at the lower of cost computed on a first-in,first-out basis, and net realizable value, and include all relatedmanufacturing, packaging and overhead costs. Provisions for inventoryobsolescence are charged against income when it is determined that theinventory item does not meet the defined quality or regulatory requirements forsale.

## ***(l)******                                    Property,Plant and Equipment***

Property,plant and equipment are reported at cost, less accumulated depreciation. TheCompany provides for depreciation using the following methods and applyingrates to amortize the cost over the estimated useful life of the assets:
|   | Building           |   | straight-line over 25 years                                  |
|--------|--------------------|--------|--------------------------------------------------------------|
|   | Equipment          |   | 20%-30% declining balance and straight-line over  5-10 years |
|   | Computer  software |   | straight-line over 7 years                                   |

Expenditures forconstruction of assets incurred prior to productive use are reflected as assetsunder construction. Depreciation commences when an asset is substantiallycompleted and ready for productive commercial use.

F-10

----

## ***(m)******                              Goodwill***

Goodwillis not amortized; however, it is subject to an annual impairment test, ortested more frequently under certain circumstances. The assessment ofimpairment is done annually at December 31, by applying a fair-value-basedtest. Measurement of the fair value of the reporting unit is based on one ormore fair value measures, including present value techniques of estimatedfuture cash flows.

## ***(n)******                                 IntangibleAssets***

Acquiredintangible assets that do not have regulatory approval and for which there areno alternative uses are expensed as acquired in-process R&D, and those thathave regulatory approval are capitalized.

Intangibleassets with finite lives are reported at cost, less accumulated amortization.The Company does not have any intangible assets with indefinite lives. TheCompany provides for amortization on a straight-line basis over the followingestimated useful lives:
|   | Patents and trademarks | 10 years |
|--------|------------------------|----------|
|   | Licenses               | 10 years |

 

## ***(o)******                                 Impairmentof Long-lived Assets***

Long-livedassets, principally comprising property, plant and equipment and intangibleassets with finite lives are reviewed for impairment whenever events orcircumstances indicate the carrying amount of assets may not be recoverable.The Company evaluates recoverability of assets to be held and used by comparingtheir carrying amount to the estimated future net undiscounted cash flowsgenerated by the assets.  If such assetsare considered to be impaired, the impairment recognized is measured as theamount by which the carrying amount of the assets exceeds the fair value of theassets.

## ***(p)******                                 RecentAccounting Pronouncements***

InJuly 2006, the Financial Accounting Standards Board (“FASB”) issued FASBInterpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”).FIN 48 prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. The Interpretation also provides guidanceon de-recognition, classification, interest and penalties, accounting ininterim periods, disclosure and transition. FIN 48 is effective in fiscal yearsbeginning after December 15, 2006. The provisions of FIN 48 are to be appliedto all tax positions upon initial adoption, with the cumulative effectadjustment reported as an adjustment to the opening balance of retainedearnings. We are currently evaluating the potential impact, if any, that theadoption of FIN 48 will have on our Consolidated Financial Statements.

# **3.****                                      CHANGEIN ACCOUNTING POLICY**

InDecember 2004, the FASB published SFAS No. 123R, *Share-BasedPayments*. SFAS No. 123R amends SFAS No. 123, *Stock-BasedCompensation* issued in 1995 and supersedes Accounting PrinciplesBoard Opinion (“APB”) No. 25 issued in 1972. Beginning on January 1, 2006, theCompany applied SFAS No. 123R using a modified version of the prospectiveapplication for the stock options granted. The financial statements of prior interim periods and fiscal years donot reflect any restated amounts.  Stockoptions are granted to employees and directors at exercise prices equal to thefair market value of the Company’s stock at the dates of grant.  Stock options generally vest equally overthree or seven years and have a term of five or 

F-11

----

tenyears. Under the transition method, Compensation expense is generallyrecognized over the period during which an employee is required to provideservice in exchange for the award (usually the vesting period). Compensationcost is recognized beginning on the required effective date for the portion ofoutstanding awards for which the requisite service has not yet been rendered,based on the grant-date fair value of those awards calculated under SFAS No.123 for either recognition or pro forma disclosures.  The expense recorded in selling, general andadministration (“SG&A”) and recognized for the year ended December 31, 2006was $968.  As of December 31, 2006, thetotal remaining unrecognized compensation cost related to non-vested stockoptions amounted to $1,708, which will be amortized over the weighted-averageremaining requisite service period of 1.9 years.  The intrinsic value of stock optionsexercised was $918, $1,602 and $1,248 for the years ended December 31, 2006,2005 and 2004, respectively.

Ifthis change in accounting policy had been applied to the previous fiscal years,the Company’s net income, basic income per share and diluted income per sharefor the years ended December 31, 2005 and December 31, 2004 would have beenreduced on a pro-forma basis as follows:

 

|                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
|                                       |       |     |       |     |       |
| Net income, as  reported                   |       | $        | 7,784      |     | $          | 7,916 |   |
| *Pro  forma*impact                         |       | (839     | )          | (733     | )          |
| *Pro  forma*net income                     |       | $        | 6,945      |     | $          | 7,183 |   |
|                                       |       |     |       |     |       |
| Basic net income  per share, as reported   |       | $        | 0.19       |     | $          | 0.20 |   |
| *Pro  forma*impact per share               |       | $        | (0.02      | )        | $          | (0.02 | ) |
| *Pro  forma*net income per share - basic   |       | $        | 0.17       |     | $          | 0.18 |   |
| *Pro forma*net  income per share - diluted |       | $        | 0.16       |     | $          | 0.18 |   |

 

Theestimated fair values of granted stock options for the years ended December 31,2006, 2005 and 2004 using the Black-Scholes option-pricing model with thefollowing weighted-average assumptions were as follows:

|                                | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------|------------|------------|------------|----------|------------|----------|------------|
|                           | ** ** | ** ** |       |     |       |     |       |
| Dividend yield                 | ** ** | **0.0**    | **%**      | 0.0      | %          | 0.0      | %          |
| Expected  volatility           | ** ** | **47**     | **%**      | 58       | %          | 63       | %          |
| Risk-free  interest rate       | ** ** | **3.9**    | **%**      | 3.6      | %          | 4.1      | %          |
| Expected option  life          | ** ** | **5 yrs**  |       | 6 yrs    |       | 5 yrs    |       |
| Fair value per option  granted | ** ** | **$**      | **1.99**   |     | $          | 2.74     |       | $ | 2.00 |   |
|                                |            |            |            |          |            |          |            |  |  |  |

 

The Black-Scholes option-pricing model was developedfor use in estimating the fair value of traded options, which have no vestingrestrictions and are fully transferable and which significantly differ from theCompany’s stock option awards. In addition, option-pricing models require theinput of highly subjective assumptions including the expected price volatility.The Company uses expected volatility rates that are based on historicalvolatility rates trended into future years. Changes in the subjective inputassumptions can materially affect the fair value estimate, and therefore theexisting model does not necessarily provide a reliable single measure of thefair value of the Company’s stock options.

F-12

----

# **4.****                                      FINANCIALINCOME (EXPENSE)**

| ** **                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest income                         | ** ** | **$**    | **521**    |     | $          | 107      |       | $ | 133 |   |
| Interest expense  and financial charges | ** ** | **(174** | **)**      | (136     | )          | (429     | )          |
|                                    | ** ** | **$**    | **347**    |     | $          | (29      | )          | $ | (296 | ) |

 

# **5.****                                      INCOMETAXES**

| ** **                                            | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| The components  of income tax expense are as follows: | ** ** | ** ** |       |     |       |     |       |
| Current                                               | ** ** | **$**      | **807**    |     | $          | 788      |       | $ | 979 |   |
| Deferred                                              | ** ** | **3,227**  |       | 765      |       | 322      |       |
|                                                  | ** ** | **$**      | **4,034**  |     | $          | 1,553    |       | $ | 1,301 |   |

 

Thereported income tax expense differs from the expected amount calculated byapplying the Company’s Canadian combined federal and provincial tax rate toincome before income tax expense.  Thereasons for this difference and the related tax effects are as follows:
| ** **                                                                                       | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Income before  income taxes from continuing operations - primarily from the Canadian  operations | ** ** | **$**      | **15,581** |     | $          | 9,337    |       | $ | 9,282 |   |
| Canadian  combined federal and provincial tax rate                                               | ** ** | **32.4**   | **%**      | 32.4     | %          | 32.4     | %          |
| Expected income  tax expense                                                                     | ** ** | **$**      | **5,048**  |     | $          | 3,026    |       | $ | 3,007 |   |
| Increase  (decrease) resulting from:                                                             | ** ** | ** ** |       |     |       |     |       |
| Foreign tax rate differences                                                                     | ** ** | **114**    |       | 111      |       | 95       |       |
| Effect of tax planning on valuation of available  loss carryforwards                             | ** ** | **—** |       | —   |       | (884     | )          |
| Effects on deferred income taxes from reduction in  income tax rates                             | ** ** | **200**    |       | —   |       | —   |       |
| Unrecognized income tax benefit of losses                                                        | ** ** | **(871**   | **)**      | (876     | )          | (786     | )          |
| Goodwill and other amortization                                                                  | ** ** | **—** |       | 111      |       | 358      |       |
| Investment tax credits                                                                           | ** ** | **(827**   | **)**      | (642     | )          | (398     | )          |
| Non-taxable capital gains related to milestones                                                  | ** ** | **(63**    | **)**      | (264     | )          | —   |       |
| Other                                                                                            | ** ** | **433**    |       | 87       |       | (91      | )          |
|                                                                                             | ** ** | **$**      | **4,034**  |     | $          | 1,553    |       | $ | 1,301 |   |

 

Deferredincome tax assets have been provided as follows:
| ** **                                                              | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Loss  carryforwards and undeducted R&D expenses                     | ** ** | **$**      | **8,166**  |     | $          | 10,953   |       | $ | 11,596 |   |
| Investment tax  credits                                                 | ** ** | **1,158**  |       | 1,028    |       | 999      |       |
| Expenses not  currently deductible for tax purposes                     | ** ** | **775**    |       | 468      |       | 809      |       |
| Deferred revenue                                                        | ** ** | **782**    |       | 923      |       | 1,444    |       |
| Share issuance  costs                                                   | ** ** | **237**    |       | 487      |       | 644      |       |
| Net book value  in excess of tax value of property, plant and equipment | ** ** | **(1,152** | **)**      | (497     | )          | (550     | )          |
| Tax value of  intangible assets in excess of net book value             | ** ** | **747**    |       | 643      |       | 698      |       |
| Total deferred  tax assets                                              | ** ** | **10,713** |       | 14,005   |       | 15,640   |       |
| Valuation  allowance                                                    | ** ** | **(2,975** | **)**      | (2,788   | )          | (3,847   | )          |
| Net deferred tax  assets                                                | ** ** | **$**      | **7,738**  |     | $          | 11,217   |       | $ | 11,793 |   |
| Deferred income  tax assets are classified as follows:                  | ** ** | ** ** |       |     |       |     |       |
| Current                                                                 | ** ** | **$**      | **3,179**  |     | $          | 2,750    |       | $ | 4,121 |   |
| Non-current                                                             | ** ** | **4,559**  |       | 8,467    |       | 7,672    |       |
|                                                                    | ** ** | **$**      | **7,738**  |     | $          | 11,217   |       | $ | 11,793 |   |

 

At December 31, 2006, the Company has accumulatedtax losses of $14,960 available for federal purposes and $11,861 for provincialpurposes in Canada, which expire from 2008 to 2015. In addition the Company has$4,124 of undeducted scientific research and experimental developmentexpenditures in Canada, which have no expiry. The Company also has $1,691 ofunclaimed Canadian investment tax credits, which expire from 2012 to 2026.These losses, 

F-13

----

undeducted scientific research and experimentaldevelopment expenditures and investment tax credits can be used to offsetfuture years’ taxes payable.

The Company has accumulated tax losses of $6,283 forfederal and state purposes in the U.S., which expire from 2010 to 2014. Subjectto certain limitations, these losses can be used to offset future years’taxable income.

In 2005, the Company re-evaluated the tax rateapplied to the temporary difference associated with capital assets acquired in2004.

As a result of tax planning initiatives madepossible by the purchase of the minority interest on April 22, 2004, theCompany was able to increase the value of its deferred income tax assets atDecember 31, 2004 and 2005 by recognizing the benefits of previouslyunrecognized tax loss carryforwards and therefore decreasing the valuationallowance.

The Company’s valuation allowance is made up of losscarryforwards in jurisdictions where taxable income is no longer generated orwhere it is more likely they will not be realized prior to expiry.

 

F-14

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**6.             INCOME PER SHARE**

Basicincome per common share is calculated by dividing the net income by theweighted-average number of the Company’s common shares outstanding during theperiod. Diluted income per common share is calculated by dividing the netincome by the sum of the weighted-average number of common shares that wouldhave been outstanding if potentially dilutive common shares had been issuedduring the period. The treasury stock method is used to compute the dilutiveeffect of warrants, stock options and the employee participation shares. Thecalculation of diluted income per common share excludes any potentialconversion of warrants, options and employee participation shares that wouldincrease income per share.

Thefollowing table sets forth the computation of basic and diluted income pershare for the years ended December 31:
| ** **                                                         | ** ** | **2006**       | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|
| Numerator:                                                         |       |           |       |       |       |       |       |
| Net income from  continuing operations                             | ** ** | **$**          | **11,547** |       | $          | 7,784      |       | $ | 7,977 |   |
| Net loss from  discontinued operations                             | ** ** | **—**     |       | —     |       | (61        | )          |
| Net income                                                         | ** ** | **$**          | **11,547** |       | $          | 7,784      |       | $ | 7,916 |   |
| Denominator:                                                       |       |           |       |       |       |       |       |
| Weighted-average  number of common shares outstanding — basic | ** ** | **41,592,507** |       | 41,471,798 |       | 39,886,219 |       |
| Weighted-average effect  of dilutive securities:                   |       |           |       |       |       |       |       |
| Stock options                                                      | ** ** | **83,175**     |       | 893,984    |       | 1,168,664  |       |
| Weighted-average number  of common shares outstanding - diluted    | ** ** | **41,675,682** |       | 42,365,782 |       | 41,054,883 |       |
|                                                               |       |           |       |       |       |       |       |
| Basic income per share:                                            |       |           |       |       |       |       |       |
| from continuing  operations                                        | ** ** | **$**          | **0.28**   |       | $          | 0.19       |       | $ | 0.20 |   |
| from  discontinued operations                                      | ** ** | **—**     |       | —     |       | —     |       |
|                                                               | ** ** | **$**          | **0.28**   |       | $          | 0.19       |       | $ | 0.20 |   |
| Diluted income per  share:                                         |       |           |       |       |       |       |       |
| from continuing  operations                                        | ** ** | **$**          | **0.28**   |       | $          | 0.18       |       | $ | 0.19 |   |
| from  discontinued operations                                      | ** ** | **—**     |       | —     | ** ** | **—** | ** ** |
|                                                               | ** ** | **$**          | **0.28**   |       | $          | 0.18       |       | $ | 0.19 |   |

 

# **7.****                                      RESTRICTEDCASH**

Inconjunction with the divestiture of its Canadian sales and marketing divisionto Shire BioChem Inc. (“Shire”), $976 of the cash proceeds were held in trustunder an escrow agreement in 2003. The release of this amount was dependentupon whether or not claims by Shire were made to the Company, by certain dates,with respect to any breach of the representations and warranties made by theCompany to Shire or any failure of the Company to perform its obligations underthe divestiture agreement. In July 2005, the final installment was releasedfrom escrow.

# **8.****                                      ACCOUNTSRECEIVABLE**

| ** **                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|
| Trade                                 | ** ** | **$**    | **20,686** |     | $          | 16,410 |   |
| Allowance for doubtful  accounts      | ** ** | **(454** | **)**      | (316     | )          |
| Income taxes and  R&D tax credits | ** ** | **451**  |       | 207      |       |
|                                  | ** ** | **$**    | **20,683** |     | $          | 16,301 |   |

#  

F-15

----

# **9.             INVENTORIES**

| ** **      | ** ** | **2006**  | ** ** | **2005** | ** ** |
|-----------------|------------|-----------|------------|----------|------------|
| Raw materials   | ** ** | **$**     | **3,682**  |     | $          | 4,576 |   |
| Work-in-process | ** ** | **1,094** |       | 1,285    |       |
| Finished goods  | ** ** | **2,814** |       | 1,768    |       |
|            | ** ** | **$**     | **7,590**  |     | $          | 7,629 |   |

 

# **10.****                               PROPERTY,PLANT AND EQUIPMENT**

| ** **                 | ** ** | **2006**    | ** ** | **2005** | ** ** |
|----------------------------|------------|-------------|------------|----------|------------|
| Land                       | ** ** | **$**       | **2,419**  |     | $          | 2,424 |   |
| Building                   | ** ** | **17,393**  |       | 17,157   |       |
| Computer  software         | ** ** | **3,794**   |       | 3,207    |       |
| Equipment                  | ** ** | **41,930**  |       | 38,563   |       |
| Assets under  construction | ** ** | **4,689**   |       | 3,498    |       |
|                       | ** ** | **70,225**  |       | 64,849   |       |
| Accumulated  depreciation  | ** ** | **(23,933** | **)**      | (19,197  | )          |
|                       | ** ** | **$**       | **46,292** |     | $          | 45,652 |   |

 

Depreciationof property, plant and equipment from continuing operations was $4,860, $4,200and $3,380, for the years ended December 31, 2006, 2005 and 2004, respectively.

# **11.****                               INTANGIBLEASSETS**

| ** **                  | ** ** | **2006**   | ** ** |
|-----------------------------|------------|------------|------------|
| ** **                  | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **Net Book** | ** ** |
| ** **                  | ** ** | **Cost**   | ** ** | **Amortization** | ** ** | **Value** | ** ** |
| **Patents  and trademarks** | ** ** | **$**      | **457**    | ** ** | **$** | **434** | ** ** | **$** | **23** | ** ** |
| **Licenses**                | ** ** | **10,126** | ** ** | **9,864** | ** ** | **262** | ** ** |
| **Other**                   | ** ** | **215**    | ** ** | **182** | ** ** | **33** | ** ** |
| ** **                  | ** ** | **$**      | **10,798** | ** ** | **$** | **10,480** | ** ** | **$** | **318** | ** ** |

 
| ** **              | ** ** | **2005**   | ** ** |
|-------------------------|------------|------------|------------|
| ** **              | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **Net Book** | ** ** |
| ** **              | ** ** | **Cost**   | ** ** | **Amortization** | ** ** | **Value** | ** ** |
| Patents and  trademarks |       | $          | 457        |   | $ | 389 |   | $ | 68 |   |
| Licenses                |       | 9,793      |       | 9,512 |   | 281 |   |
| Other                   |       | 215        |       | 165 |   | 50 |   |
|                    |       | $          | 10,465     |   | $ | 10,066 |   | $ | 399 |   |

 

Amortizationof intangible assets from continuing operations was $275, $345 and $1,077, forthe years ended December 31, 2006, 2005 and 2004, respectively. The aggregateamortization for each of the five succeeding fiscal years are as follows: 2007- $318; thereafter - $nil.

# **12.****                               ACCOUNTSPAYABLE AND ACCRUED LIABILITIES**

| ** **              | ** ** | **2006**  | ** ** | **2005** | ** ** |
|-------------------------|------------|-----------|------------|----------|------------|
| Trade                   | ** ** | **$**     | **4,688**  |     | $          | 4,533 |   |
| Accrued  liabilities    | ** ** | **905**   |       | 1,045    |       |
| Employee-related  items | ** ** | **5,347** |       | 3,159    |       |
|                    | ** ** | **$**     | **10,940** |     | $          | 8,737 |   |

 

F-16

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**13.          DEFERRED REVENUES**
| ** **                         | ** ** | **2006**     | ** ** |
|------------------------------------|------------|--------------|------------|
| ** **                         | ** ** | **Deferred** | ** ** | **Accumulated** | ** ** | ** ** | ** ** | **Less:** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Revenues** | ** ** | **Amortization** | ** ** | **Net** | ** ** | **Current Portion** | ** ** | **Long-Term** | ** ** |
| **SpectroPharm  product line (a)** | ** ** | **$**        | **10,500** | ** ** | **$** | **(10,500** | **)** | **$** | **—** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |
| ***Anipryl®*(b)**             | ** ** | **29,893**   | ** ** | **(29,067** | **)** | **826** | ** ** | **114** | ** ** | **712** | ** ** |
| **Other**                          | ** ** | **215**      | ** ** | **—** | ** ** | **215** | ** ** | **215** | ** ** | **—** | ** ** |
| ** **                         | ** ** | **$**        | **40,608** | ** ** | **$** | **(39,567** | **)** | **$** | **1,041** | ** ** | **$** | **329** | ** ** | **$** | **712** | ** ** |

 
| ** **                     | ** ** | **2005**     | ** ** |
|--------------------------------|------------|--------------|------------|
| ** **                     | ** ** | **Deferred** | ** ** | **Accumulated** | ** ** | ** ** | ** ** | **Less:** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Revenues** | ** ** | **Amortization** | ** ** | **Net** | ** ** | **Current Portion** | ** ** | **Long-Term** | ** ** |
| SpectroPharm  product line (a) |       | $            | 10,522     |   | $ | (10,522 | ) | $ | — |   | $ | — |   | $ | — |   |
| *Anipryl®*(b)             |       | 29,893       |       | (25,768 | ) | 4,125 |   | 3,298 |   | 827 |   |
| Other                          |       | 373          |       | — |   | 373 |   | 373 |   | — |   |
|                           |       | $            | 40,788     |   | $ | (36,290 | ) | $ | 4,498 |   | $ | 3,671 |   | $ | 827 |   |

 

Amortizationof deferred revenues totalled $3,301, $3,701 and $5,495 for the years endedDecember 31, 2006, 2005, and 2004, respectively.

## ***(a)******                                 SpectroPharmProduct Line***

InMay 2000, the Company entered an arrangement with GlaxoSmithKline (“GSK”)Consumer Healthcare, formerly Block Drug Company (Canada) Limited, with respectto the Company’s SpectroPharm line of dermatology products, which included thesale of product rights to GSK Consumer Healthcare in exchange for anon-refundable fee, the acquisition of inventory on hand, a supply agreementand a technical services arrangement. As a result of the Company’s ongoingobligations to GSK Consumer Healthcare pursuant to this arrangement, the $8,169of net proceeds from the sale of the product rights have been deferred and havebeen recognized as revenue on a straight-line basis over the period to January31, 2005.

## ***(b)*****                                 Anipryl*®***

InDecember 1997, the Company entered into an alliance with Pfizer Inc. (“Pfizer”),whereby Pfizer was granted a perpetual exclusive license to market, sell anddistribute *Anipryl®* in exchangefor non-refundable fees, royalties based on the worldwide sales of *Anipryl®*, a manufacturing and supplyagreement and a research collaboration.

InDecember 1999, the Company and Pfizer amended the terms of the alliance (the “FirstAmendment”) whereby $9,000 of potential additional non-refundable fees wereeliminated in exchange for the Company receiving additional regulatory supportfor a potential new indication and additional manufacturing data. Thesepotential additional non-refundable fees would have become payable if Pfizerhad exercised its right to acquire product registrations following regulatoryapproval of *Anipryl®*  in designated European countries.

InDecember 2001, the Company and Pfizer further amended the terms of the alliance(the “Second Amendment”) whereby the Company received a payment of $3,150 inrespect of minimum royalty entitlements for the second and third three-yearperiods ending December 31, 2001 and 2002 and modifications to future royaltyentitlements. The Second Amendment also resulted in all rights to *Anipryl®* outside of North Americareverting back to the Company, forfeiture of any additional minimum royaltyentitlements and the termination of any future collaborative research on newindications or formulations for *Anipryl®*.

F-17

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Underthe amended arrangement, the Company is not entitled to receive any additionalnon-refundable fees. The $28,090 in non-refundable fees already received fromPfizer have been deferred and are being recognized as revenue on a straight-linebasis over the period to December 31, 2006.

Theportion of the $3,150 payment allocated to the modifications of future royaltyentitlements has been deferred and is being recognized as revenue on astraight-line basis over the period to December 31, 2013.

Theportion of the $3,150 payment referable to the minimum royalty entitlement forthe three-year period ending December 31, 2001 was earned and recognized asrevenue in the fourth quarter of 2001. The portion referable to the third yearin the three-year period ending December 31, 2002 was deferred and recognizedas revenue on a straight-line basis during 2002.

# **14.****                               CREDITFACILITIES**

TheCompany has the following credit facilities available, expiring June 2007:

·                  CDN$15million or U.S.$ equivalent operating facility payable within 364 days upondrawing upon the facility. The operating facility can be extended by one yearupon agreement with the lender. As at December 31, 2006, no amount was drawnunder this facility.

·                  CDN$10million or U.S.$ equivalent term facility, repayable in full at the end of theterm. As at December 31, 2006 and 2005 no amount was drawn under this facility.

As of December 31, 2006, aletter of credit was issued to the Company’s payroll provider in the amount of$621 which expires on March 25, 2007.

Interest under the creditfacilities (both term and operating) is based on the bank’s prime lending rateprovided that the Company meets certain ratios, which as at December 31, 2006were met.

Amountsdrawn under both credit facilities would be secured by specific assets ofDRAXIS Specialty Pharmaceuticals Inc., and shares and guarantees of certainother subsidiaries.

TheCompany was in compliance with all lending covenants as at December 31, 2006and 2005.

# **15.****                               OTHERLIABILITIES**

Otherliabilities comprise the following:

(a)                                  In 2005, in connection with thediscontinuance of the brachytherapy product line, the Company recorded inSG&A expenses an amount of $457, of which $252 is payable in quarterlyinstallments of $19, with the first payment on April 30, 2006 and the finalpayment on January 31, 2010.

(b)                                 Incentive plans which provide for cashpayments to be made in the future to eligible participants based on achievementof certain targets within the year.

# **16.****                               MINORITYINTEREST**

OnApril 22, 2004, the Company completed the acquisition of the 32.7% interest inthe Company’s manufacturing subsidiary, DRAXIS Pharma, which was previouslyowned by SGF Santé Inc. (“SGF”). The $9.6 million (CDN$13.0 million) cashacquisition has been accounted for by the purchase method of accounting andallocated to identifiable assets and liabilities based on their estimated fairvalues as follows:

F-18

----

 

| Minority interest              |   | $      | 3,992  |   |
|--------------------------------|--------|--------|--------|--------|
| Property, plant  and equipment |   | 6,785  |   |
| Deferred income  tax liability |   | (1,220 | )      |
| Total purchase price           |   | $      | 9,557  |   |

 

Theestimates of fair value were determined by the Company’s management based on anindependent valuation of property, plant and equipment.

# **17.****                               SHAREHOLDERS’EQUITY**

## ***(a)******                                 CommonShare Offering***

OnApril 22, 2004, the Company closed its offering of 3,053,436 units at a priceof $4.82 (CDN$6.55) per unit for proceeds net of related expenses of $13,385(CDN$18,213). Each unit consisted of one common share and one-half of one sharepurchase warrant. Each whole warrant entitled the holder to acquire one commonshare of the Company at a price of CDN$8.50 at any time prior to April 24,2006.  Included as a component ofshareholders’ equity was $916, which represented the fair value of the warrantsissued. The fair value of the warrants was determined based on the price of theoffering using the Black-Scholes option-pricing model.  All warrants expired unexercised on April 24,2006.

## ***(b)******                                 StockRepurchase Program***

OnDecember 7, 2005, the Board of Directors of the Company authorized therepurchase for cancellation of up to 3,522,530 of its common shares through aNormal Course Issuer Bid (the “2005 Issuer Bid”), which represented 10% of thepublic float on December 6, 2005.  Inaccordance with the rules of the TSX, such purchases could begin on December15, 2005 and end no later than December 14, 2006. The Company received approvalfrom the TSX on December 18, 2006 to renew its Normal Course Issuer Bid (the “2006Issuer Bid”). DRAXIS may now repurchase up to 3,397,011 of its common shares,which represents 10% of the 33,970,112 common shares in the public float as ofDecember 14, 2006, beginning on December 20, 2006 and until December 19, 2007or until such earlier date when the Company purchases the maximum allowable numberof shares or elects to terminate the bid. All shares purchased will be acquiredthrough the facilities of the TSX and will be cancelled. DRAXIS had 41,492,138common shares issued and outstanding as of December 14, 2006.

During2006, 713,200 shares were purchased and cancelled in accordance with the 2005Issuer Bid at an average price of $4.59 for total consideration of $3,277.  The excess of $1,779 over the stated capitalof the acquired shares was deducted from additional paid-in capital.

Noshares were purchased in 2006 in accordance with the 2006 Issuer Bid.

F-19

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**18.          STOCK-BASED COMPENSATION PLANS**

## ***(a)******                                 StockOption Plan***

OnMay 18, 2006, the shareholders approved a stock option plan referred to as the “2006Stock Option Plan” to permit the Board of Directors to grant options topurchase common shares to directors, officers and employees of the Company andsubsidiaries in order to encourage these persons to work towards andparticipate in the growth and development of the Company and its subsidiaries.The Board of Directors determines the exercise price per common share; thenumber of options for common shares that may be allotted to each designateddirector, officer or employee; the period during which any option may beexercised; and all the terms and conditions of the option in accordance withthe applicable requirements of any relevant regulatory authority or stockexchange. The options are exercisable for a period not exceeding ten years fromthe date of the grant and generally options vest one-third on each of thefirst, second and third anniversaries of the date of grant.  The maximum number of options for issuanceunder the 2006 Stock Option Plan is 1,500,000.

OnFebruary 3, 1988 and amended on June 27, 2001, the shareholders approved astock option plan referred to as “Stock Option Plan of DRAXIS Health Inc.” topermit the Board of Directors to grant options to purchase common shares todirectors, officers, employees and arm’s length consultants of the Company andits subsidiaries so as to link corporate compensation to enhanced shareholdervalue. The Board of Directors determines the price per common share; the numberof options for common shares that may be allotted to each designated director,officer, employee or arm’s length consultant; the period during which anyoption may be exercised; and all the terms and conditions of the option inaccordance with the applicable requirements of any relevant regulatoryauthority or stock exchange. The options are exercisable for a period notexceeding 10 years from the date of the grant and generally options vestone-third on each of the first, second and third anniversaries of the date ofgrant.  The maximum number of options forissuance under the Stock Option Plan of Draxis Health Inc. is 7,500,000.  No additional options are available forgranting under this plan since the 2006 Stock Option Plan was adopted on May18, 2006

TheCompany has adopted a guideline limiting the aggregate number of common sharesthat can be issued at any point in time, through the exercise of options, to13% of the Company’s outstanding common shares. As at December 31, 2006 theaggregate number of shares issuable pursuant to outstanding options represented5.4% (2005 — 6.4%) of the outstanding common shares.

F-20

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Thefollowing is a summary of the number of common shares issuable pursuant tooutstanding stock options:
| ** **                                  | ** ** | **Outstanding** | ** ** |
|---------------------------------------------|------------|-----------------|------------|
| ** **                                  | ** ** | **2006**        | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                        |       |            |       |   |   |   |   |
| Balance, beginning of year                  | ** ** | **2,652,620**   |       | 2,753,232 |   | 3,097,942 |   |
| Increase (decrease) resulting from:         |       |            |       |   |   |   |   |
| Granted                                     | ** ** | **330,000**     |       | 565,000 |   | 360,000 |   |
| Exercised                                   | ** ** | **(647,333**    | **)**      | (648,279 | ) | (609,177 | ) |
| Cancelled                                   | ** ** | **(26,667**     | **)**      | (17,333 | ) | (80,333 | ) |
| Expired                                     | ** ** | **(50,625**     | **)**      | — |   | (15,200 | ) |
| Balance, end of year                        | ** ** | **2,257,995**   |       | 2,652,620 |   | 2,753,232 |   |
|                                        |       |            |       |   |   |   |   |
| Exercisable at December 31                  | ** ** | **1,310,495**   |       | 1,501,898 |   | 1,721,565 |   |
|                                        |       |            |       |   |   |   |   |
| Weighted-average exercise price of options: | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outstanding, end of year                    | ** ** | **CDN$4.23**    |       | CDN$3.94 |   | CDN$3.41 |   |
| Exercisable, end of year                    | ** ** | **CDN$4.30**    |       | CDN$3.65 |   | CDN$3.40 |   |
| Granted                                     | ** ** | **CDN$5.06**    |       | CDN$5.79 |   | CDN$4.67 |   |
| Exercised                                   | ** ** | **CDN$3.41**    |       | CDN$3.07 |   | CDN$3.37 |   |
| Cancelled                                   | ** ** | **CDN$6.20**    |       | CDN$5.06 |   | CDN$3.16 |   |
| Expired                                     | ** ** | **CDN$3.33**    |       | — |   | CDN$2.36 |   |

 

Thefollowing table summarizes information about stock options outstanding atDecember 31, 2006:
| ** **                              | ** ** | **Options Outstanding** | ** **   | **Options Exercisable**                                                | ** ** |
|-----------------------------------------|------------|------------------------------|--------------|-----------------------------------------------------------------------------|------------|
| **Range of Exercise  Prices** | ** ** | **Number  Outstanding**      | *** *** | **Weighted-  Average  Remaining  Contractual**Life* (in years)*** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Aggregate   Intrinsic  Value  ($000’s)** | ** ** | **Number  Exercisable** | *** *** | **Weighted-  Average  Remaining  Contractual**Life* (in years)*** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic  Value  ($000’s)** | ** ** |
|                                    |       |                         |         |                                                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| CDN$2.01 - $2.50                        |       | 572,995                      |         | 4.37                                                                        |       | CDN$2.36 |   | CDN$1,887 |   | 222,995 |   | 1.04 |   | CDN$2.35 |   | CDN$746 |   |
| CDN$2.51 - $3.00                        |       | 37,500                       |         | 6.62                                                                        |       | CDN$2.63 |   | CDN$112 |   | — |   | — |   | — |   | — |   |
| CDN$3.01 - $3.50                        |       | 40,000                       |         | 1.84                                                                        |       | CDN$3.25 |   | CDN$95 |   | 26,667 |   | 1.84 |   | CDN$3.25 |   | CDN$63 |   |
| CDN$3.51 - $4.00                        |       | 352,500                      |         | 0.29                                                                        |       | CDN$3.88 |   | CDN$614 |   | 352,500 |   | 0.29 |   | CDN$3.88 |   | CDN$614 |   |
| CDN$4.01 - $4.50                        |       | 125,000                      |         | 2.00                                                                        |       | CDN$4.30 |   | CDN$165 |   | 125,000 |   | 2.00 |   | CDN$4.30 |   | CDN$165 |   |
| CDN$4.51 - $5.00                        |       | 200,000                      |         | 3.36                                                                        |       | CDN$4.70 |   | CDN$184 |   | 113,333 |   | 2.61 |   | CDN$4.70 |   | CDN$104 |   |
| CDN$5.01 - $6.65                        |       | 930,000                      |         | 4.21                                                                        |       | CDN$5.50 |   | CDN$112 |   | 470,000 |   | 3.70 |   | CDN$5.49 |   | CDN$62 |   |
|                                    |       | 2,257,995                    |         | 3.45                                                                        |       | CDN$4.23 |   | CDN$3,170 |   | 1,310,495 |   | 2.04 |   | CDN$4.30 |   | CDN$1,755 |   |

 

F-21

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***(b)           Deferred Share Unit Plan***

Underthe Company’s Deferred Share Unit Plan, members of senior management can electto receive up to 20% of base salary and up to 100% of any bonus payable inrespect of that year in deferred share units (“DSUs”) in lieu of cashcompensation. An election must be made by December 1 of each year in respect ofbase salary and bonus for the following year. The elected amount is convertedto a number of DSUs equal to the elected amount divided by the closing price ofthe common shares on the TSX or NASDAQ on December 31 of each year, based on apurchase commitment as of December 1 of the prior year. Participants are notentitled to redeem any DSUs until cessation of employment with the Company forany reason. The value of DSUs redeemable by the participants will be equivalentto the market value of the common share at the time of redemption. The DSUsmust be redeemed no later than the end of the first calendar year commencingafter the date of cessation of employment. The DSU liability is re-measured atthe end of each reporting period based on the market price of the Company’scommon stock. The net increase or decrease in the value of the DSUs is recordedas compensation cost included in *SG&A*expense.

Thefollowing summarizes the number of DSUs issued and outstanding and its impact onSG&A:
| ** **                    | ** ** | **2006**    | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|-------------|------------|----------|------------|----------|------------|
|                          |       |        |       |     |       |     |       |
| Balance,  beginning of period | ** ** | **199,868** |       | 190,313  |       | 174,529  |       |
| Issued                        | ** ** | **30,579**  |       | 9,555    |       | 15,784   |       |
| Balance, end of  period       | ** ** | **230,447** |       | 199,868  |       | 190,313  |       |
|                          |       |        |       |     |       |     |       |
| DSU expense (recovery)        | ** ** | **245**     |       | ($117    | )          | $        | 284        |   |
|                               |            |             |            |          |            |          |            |  |

 

F-22

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# **19.****                               SEGMENTEDINFORMATION AND MAJOR CUSTOMERS**

### **Industry Segmentation**

Forpurposes of operating decision-making and assessing performance, managementconsiders that it operates in three segments: Radiopharmaceuticals,Manufacturing, and Corporate and Other. Executive management assesses theperformance of each segment based on segment income. The segments areidentified as reporting segments based on the distinct management teams,customer base, production process and regulatory requirements of each. The Corporateand Other segment includes revenues earned via royalties and milestones,inter-segment eliminations and corporate expenses. The accounting policies usedto determine segmented results and measure segmented assets are the same asthose described in the summary of significant accounting policies.
| ** **                                         | ** **   | **2006**     | ** **   | **2005**     | ** **   | **2004**     | ** **   |
|----------------------------------------------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|
| ***PRODUCT  SALES REVENUES***                      | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Radiopharmaceuticals                               | ** **   | **$**        | **21,508**   |         | $            | 19,290       |         | $ | 17,172 |   |
| Manufacturing                                      | ** **   | **64,731**   |         | 54,743       |         | 46,461       |         |
| Corporate and Other                                | ** **   | **(2,694**   | **)**        | (1,044       | )            | (1,940       | )            |
|                                               | ** **   | **$**        | **83,545**   |         | $            | 72,989       |         | $ | 61,693 |   |
| ***ROYALTY  AND LICENSING REVENUES***              | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Radiopharmaceuticals                               | ** **   | **$**        | **(3**       | **)**        | $            | 9            |         | $ | — |   |
| Manufacturing                                      | ** **   | **—**   |         | —       |         | —       |         |
| Corporate and Other                                | ** **   | **5,425**    |         | 6,435        |         | 7,627        |         |
|                                               | ** **   | **$**        | **5,422**    |         | $            | 6,444        |         | $ | 7,627 |   |
| ***TOTAL  REVENUES***                              | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Radiopharmaceuticals                               | ** **   | **$**        | **21,505**   |         | $            | 19,299       |         | $ | 17,172 |   |
| Manufacturing                                      | ** **   | **64,731**   |         | 54,743       |         | 46,461       |         |
| Corporate and Other                                | ** **   | **2,731**    |         | 5,391        |         | 5,687        |         |
|                                               | ** **   | **$**        | **88,967**   |         | $            | 79,433       |         | $ | 69,320 |   |
| ***PRODUCT  GROSS MARGIN***                        | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Radiopharmaceuticals                               | ** **   | **$**        | **13,433**   |         | $            | 11,593       |         | $ | 10,028 |   |
| Manufacturing                                      | ** **   | **23,215**   |         | 14,628       |         | 11,530       |         |
| Corporate and Other                                | ** **   | **(186**     | **)**        | (68          | )            | 342          |         |
|                                               | ** **   | **$**        | **36,462**   |         | $            | 26,153       |         | $ | 21,900 |   |
| ***SELLING,  GENERAL AND ADMINISTRATION EXPENSE*** |         |         |         |         |         |         |         |
| Radiopharmaceuticals                               | ** **   | **$**        | **4,380**    |         | $            | 4,660        |         | $ | 3,906 |   |
| Manufacturing                                      | ** **   | **6,487**    |         | 5,086        |         | 3,492        |         |
| Corporate and Other(1)                             | ** **   | **8,558**    |         | 6,439        |         | 5,868        |         |
|                                               | ** **   | **$**        | **19,425**   |         | $            | 16,185       |         | $ | 13,266 |   |
| ***RESEARCH  AND DEVELOPMENT EXPENSE***            | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Radiopharmaceuticals                               | ** **   | **$**        | **2,372**    |         | $            | 2,103        |         | $ | 1,948 |   |
| Manufacturing                                      | ** **   | **—**   |         | —       |         | —       |         |
| Corporate and Other                                | ** **   | **—**   |         | —       |         | —       |         |
|                                               | ** **   | **$**        | **2,372**    |         | $            | 2,103        |         | $ | 1,948 |   |
| ***SEGMENT  INCOME (LOSS)(2)***                    | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Radiopharmaceuticals                               | ** **   | **$**        | **6,678**    |         | $            | 4,839        |         | $ | 4,174 |   |
| Manufacturing                                      | ** **   | **16,728**   |         | 9,542        |         | 8,038        |         |
| Corporate and Other                                | ** **   | **(3,319**   | **)**        | (72          | )            | 2,101        |         |
|                                               | ** **   | **$**        | **20,087**   |         | $            | 14,309       |         | $ | 14,313 |   |
| ***DEPRECIATION  AND AMORTIZATION***               | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Radiopharmaceuticals                               | ** **   | **$**        | **1,110**    |         | $            | 1,047        |         | $ | 949 |   |
| Manufacturing                                      | ** **   | **3,688**    |         | 3,105        |         | 2,417        |         |
| Corporate and Other                                | ** **   | **337**      |         | 393          |         | 1,091        |         |
|                                               | ** **   | **$**        | **5,135**    |         | $            | 4,545        |         | $ | 4,457 |   |
| ***OPERATING  INCOME (LOSS)(3)***                  | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Radiopharmaceuticals                               | ** **   | **$**        | **5,568**    |         | $            | 3,792        |         | $ | 3,225 |   |
| Manufacturing                                      | ** **   | **13,040**   |         | 6,437        |         | 5,621        |         |
| Corporate and Other                                | ** **   | **(3,656**   | **)**        | (465         | )            | 1,010        |         |
|                                               | ** **   | **$**        | **14,952**   |         | $            | 9,764        |         | $ | 9,856 |   |

----

*(1)**      **Stock-based compensationexpense was recorded in SG&A expense of $968 in 2006 (2005 - $nil; 2004 -$nil).*

*(2)**      **Segment income (loss) fromcontinued operations before depreciation and amortization, financial expense,foreign exchange gain (loss), other income, income taxes and minority interest.*

*(3)**      **Segment income (loss) fromcontinuing operations before financial expense, foreign exchange gain (loss),other income, income taxes and minority interest.*
| ***IDENTIFIABLE  ASSETS*** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
|----------------------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|
| Radiopharmaceuticals       | ** **   | **$**        | **15,332**   |         | $            | 12,340       |         | $ | 12,354 |   |
| Manufacturing              | ** **   | **54,162**   |         | 52,664       |         | 50,103       |         |
| Corporate and  Other       | ** **   | **36,468**   |         | 30,816       |         | 26,328       |         |
|                       | ** **   | **$**        | **105,962**  |         | $            | 95,820       |         | $ | 88,785 |   |

 

F-23

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| **Geographic Segmentation** | ** **   | **2006**     | ** **   | **2005**     | ** **   | **2004**     | ** **   |
|----------------------------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|
| ***REVENUES(4)***                | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Canada                           | ** **   | **$**        | **39,891**   |         | $            | 39,026       |         | $ | 33,609 |   |
| United States                    | ** **   | **47,900**   |         | 39,612       |         | 35,310       |         |
| Other                            | ** **   | **1,176**    |         | 795          |         | 401          |         |
|                             | ** **   | **$**        | **88,967**   |         | $            | 79,433       |         | $ | 69,320 |   |

----

*(4)**      **Revenues are attributable tocountries based upon the location of the customer.*

 

***LONG-LIVED ASSETS***

Substantially all of the Company’sproperty, plant and equipment, goodwill and intangible assets are located inCanada.  Goodwill is recorded within theradiopharmaceutical segment.

 
| **Expenditures for Property, Plant and Equipment** | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Radiopharmaceuticals                                                        | ** ** | **$**      | **1,434**  |     | $          | 461      |       | $ | 835 |   |
| Manufacturing                                                               | ** ** | **4,222**  |       | 4,119    |       | 3,928    |       |
| Corporate and  Other                                                        | ** ** | **—** |       | 39       |       | 38       |       |
|                                                                        | ** ** | **$**      | **5,656**  |     | $          | 4,619    |       | $ | 4,801 |   |

 
| **Product Sales Revenues By Major Product Groups** | ** ** | **2006**   | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Radiopharmaceuticals                                                             | ** ** | **$**      | **21,508** |     | $          | 19,290   |       | $ | 17,172 |   |
| Manufacturing -  Sterile                                                         | ** ** | **51,529** |       | 41,488   |       | 31,270   |       |
| Manufacturing -  Non Sterile                                                     | ** ** | **13,202** |       | 13,255   |       | 15,191   |       |
| Corporate and  Other                                                             | ** ** | **295**    |       | 499      |       | 22       |       |
| Inter-segment  eliminations                                                      | ** ** | **(2,989** | **)**      | (1,543   | )          | (1,962   | )          |
|                                                                             | ** ** | **$**      | **83,545** |     | $          | 72,989   |       | $ | 61,693 |   |

 
| **Major Customers**    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
| Customer A  (Manufacturing) | ** ** | **23.0** | **%**      | 23.0     | %          | 20.0     | %          |
| Customer B  (Manufacturing) | ** ** | **23.0** | **%**      | 22.0     | %          | 18.0     | %          |
| Customer C  (Manufacturing) | ** ** | **10.0** | **%**      | 13.0     | %          | 17.0     | %          |
|                        | ** ** | **56.0** | **%**      | 58.0     | %          | 55.0     | %          |

 

F-24

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# **20.****                               COMMITMENTSAND CONTINGENCIES**

### **Operating Leases and Service Contracts**

Theoperating leases relate to the rental of office space, office equipment andsome ancillary lab and production related equipment. Service contracts relateto a portion of information services outsourced to a third party.

### **Royalty and Milestone Payments**

TheCompany is obligated to make certain royalty payments based on related productsales and milestone payments based on the achievement of certain specifiedevents.

TheCompany is committed under various contractual commitments requiring minimumannual payments as follows:

 
| ** **                       | ** ** | **Payment due by end of:** | ** ** |
|----------------------------------|------------|------------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                                      | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** |
| Operating leases                 |       | 45                                             |       | 16 |   | 16 |   | 11 |   | 2 |   | — |   | — |   |
| Service contracts                |       | 370                                            |       | 271 |   | 82 |   | 17 |   | — |   | — |   | — |   |
| Milestone obligations            |       | 1,100                                          |       | 150 |   | 150 |   | 150 |   | 150 |   | 250 |   | 250 |   |
| Total contractual  obligations   |       | 1,515                                          |       | 437 |   | 248 |   | 178 |   | 152 |   | 250 |   | 250 |   |

 

Allcontractual obligations related to 2006 and 2005 were fully paid as of December31, 2006 and December 31, 2005, respectively.

### **Legal Proceedings**

Fromtime to time, the Company becomes involved in legal proceedings and claims thatarise in the ordinary course of business.

TheCompany considers that the ultimate liability with respect to any known actionswill not materially affect the business, financial position, results ofoperations or cash flows of the Company.

InJuly 2005, a claim was filed before the Superior Court of Justice of Ontarioagainst the Company together with other defendants alleging that *Permax®*, a drug that the Companydistributed in Canada for a third party manufacturer prior to July 2003, causes“compulsive/obsessive behaviour, including pathological gambling”.  The plaintiff is seeking to have this actioncertified as a class action.  The Companybelieves this claim against it is without merit and intends to vigorouslydefend this proceeding and any motion for certification. No amounts have beenaccrued in the accounts pursuant to the claim.

F-25

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# **21.****                               RELATEDPARTY TRANSACTIONS**

Significantrelated party transactions and balances in the accompanying financialstatements are as follows:
| ** **                                                                                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Rent paid to a company jointly controlled by a  member of the Board of Directors included in *SG&A*expenses | ** ** | **$**    | **127**    |     | $          | 123      |       | $ | 125 |   |
|                                                                                                                 |            |          |            |          |            |          |            |  |  |  |

 

Theaforementioned transaction is in the normal course of operations, is measuredat the exchange amount, which is the amount of consideration established andagreed to by the related parties, and has been fully paid as of the balancesheet dates.

# **22.****                               FINANCIALINSTRUMENTS**

### **Fair Value**

Thefair values of cash and cash equivalents, accounts receivable, accounts payableand accrued liabilities approximate their carrying values because of theshort-term maturity of those instruments. The Company is not party to anyderivative instruments.

### **Credit Risk**

TheCompany is subject to credit risk through trade receivables and short-term cashinvestments. Credit risk with respect to trade receivables is limited given thecreditworthiness of the counterparties. The Company invests its excessliquidity in high quality government securities and short-term commercialpaper, bank deposits and money market mutual funds.

### **Currency Risk**

TheCompany’s foreign exchange exposure for accounting purposes mainly relates tothe U.S.-denominated monetary assets and liabilities of the Canadian operationsof the Company. Changes in the exchange rate may result in a decrease orincrease in the foreign exchange gain or loss. The Company does not activelyhedge this exposure but reduces the exposure by maintaining the minimum levelof U.S.-denominated cash available to meet its short-term cash requirements.

# **23.****                               COMPARATIVEINFORMATION**

TheCompany has reclassified certain prior years’ information to conform with thecurrent year’s presentation.

F-26

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