UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, DC 20549

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FORM 20-F

|(Mark One)
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|o         
|OR        
|ý         
|OR        
|o         

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, 2nd FLOOR, MISSISSAUGA, ONTARIO, CANADA L4V 1P1
(Address of principal executive offices)

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Securities
registered or to be registered pursuant to Section 12(b) of the Act.

|Title of each class |  | Name of each exchange on which registered
|------------------- |  | -----------------------------------------
|NONE                |  | NONE                                     

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

COMMON SHARES(Title of Class)

Securities
for which there is a reporting obligation pursuant to Section 15(d) of the Act.

NONE(Title of Class)

Indicate
the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report.

Shares37,297,817
(as of 12/31/03)

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

Yes
ý No o

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

Item
17 o Item 18 ý



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|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                                                   |  | 11 
|ITEM 5.   |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 |  | 46 
|ITEM 6.   |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   |  | 64 
|ITEM 7.   |  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            |  | 83 
|ITEM 8.   |  | FINANCIAL INFORMATION                                                        |  | 84 
|ITEM 9.   |  | THE OFFER AND LISTING                                                        |  | 85 
|ITEM 10.  |  | ADDITIONAL INFORMATION                                                       |  | 86 
|ITEM 11.  |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   |  | 97 
|ITEM 12.  |  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       |  | 98 
|ITEM 13.  |  | DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES                             |  | 99 
|ITEM 14.  |  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |  | 99 
|ITEM 15.  |  | CONTROLS AND PROCEDURES                                                      |  | 99 
|ITEM 16A. |  | AUDIT COMMITTEE FINANCIAL EXPERT                                             |  | 99 
|ITEM 16B. |  | CODE OF ETHICS                                                               |  | 99 
|ITEM 16C. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                       |  | 99 
|ITEM 16D. |  | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                   |  | 100
|ITEM 16E. |  | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       |  | 100
|ITEM 17.  |  | FINANCIAL STATEMENTS                                                         |  | 100
|ITEM 18.  |  | FINANCIAL STATEMENTS                                                         |  | 100
|ITEM 19.  |  | EXHIBITS                                                                     |  | 101

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Item 1. Identity of Directors, Senior Management and Advisers

Not Applicable

Item 2. Offer Statistics and Expected Timetable

Not Applicable

Item 3. Key Information

DRAXIS Health Inc. ("DRAXIS" or the "Company") is a specialty pharmaceutical company with core competencies in two segments: the development, production,
marketing and distribution of radiopharmaceuticals through DRAXIMAGE Inc. ("DRAXIMAGE") and the provision of contract pharmaceutical manufacturing services, specializing in liquid and freeze-dried
injectables and other sterile products through DRAXIS Pharma Inc. ("DPI"). The Company believes that both DRAXIMAGE and DPI have significant long-term growth potential and has invested considerable
financial and management resources in developing these businesses.

Our
subsidiary Deprenyl Animal Health, Inc. ("DAHI") receives licensing and royalty revenue related toAnipryl®, a
companion animal health product.

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

The
selected data set forth in the 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 in conjunction with, and are qualified in their entirety by, reference to the audited Consolidated Financial Statements and Notes thereto for the year ended December 31,
2003.

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|                                  |                                                                                        | U.S. GAAP
(in thousands of U.S. dollars except share-related data) |     
|--------------------------------- | -------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ----
|
|Operations                        |                                                                                        |                                                                    |     
|                                  | Revenues                                                                               |                                                                    | $   
|                                  | Operating income (loss)                                                                |                                                                    |     
|                                  | Income (loss) from continuing operations before cumulative effect of accounting change |                                                                    |     
|                                  | Income (loss) from discontinued
operations, net of taxes                               |                                                                    |     
|                                  | Cumulative effect of accounting change, net of tax                                     |                                                                    |     
|                                  |                                                                                        |                                                                    |     
|                                  | Net income (loss)                                                                      |                                                                    | $   
|                                  |                                                                                        |                                                                    |     
|Basic income (loss) per share     |                                                                                        |                                                                    |     
|                                  | From continuing operations before cumulative effect of accounting change               |                                                                    |     
|                                  | From discontinued operations                                                           |                                                                    |     
|                                  | From cumulative effect of accounting change                                            |                                                                    |     
|                                  |                                                                                        |                                                                    |     
|Basic income (loss) per share     |                                                                                        | $                                                                  | 0.36
|                                  |                                                                                        |                                                                    |     
|Financial Position at December 31 |                                                                                        |                                                                    |     
|                                  | Cash and cash equivalents                                                              |                                                                    |     
|                                  | Total assets                                                                           |                                                                    |     
|                                  | Long-term debt                                                                         |                                                                    |     
|                                  | Common shareholders' equity                                                            |                                                                    |     
|                                  | Book value per common share                                                            |                                                                    |     
|Share Information                 |                                                                                        |                                                                    |     
|                                  | Number of shares outstanding at year end                                               |                                                                    |     
|                                  | Weighted average number of shares outstandingbasic                                    |                                                                    |     

Overview

This Annual Report (Form 20-F) contains forward-looking statements (within the meaning of the Securities Exchange Act of 1934, as amended) and
information that are based on management's beliefs, as well as assumptions made by and information currently available to management. When used in this Annual Report (Form 20-F),
the words "anticipate," "estimate," "believe," "expect," "potential," "intend," "designed" and "should" and similar expressions are intended to identify forward-looking statements. These
forward-looking statements necessarily make numerous assumptions with respect to industry performance; general business, economic and regulatory conditions; access to markets and materials; and other
matters, all of which are inherently subject to significant uncertainties and contingencies and many of which are beyond the Company's control. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The Company believes that any of the following risk
factors could cause the Company's actual results to differ from those that may have been or may be projected in forward-looking statements made by or on behalf of the Company from time to

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time.
The forward-looking statements in this Annual Report (Form 20-F) are contained principally under Items 4 and 5.

RISK FACTORS

The following list of factors may not be exhaustive, as we operate in a rapidly changing business, and new risk factors emerge from time to time. We cannot
predict such risk factors, nor can we assess the impact, if any, of such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ
materially from those projected in any forward-looking statements. Accordingly, do not rely on forward-looking statements as a prediction of actual results.

The
following summarizes the major risks and uncertainties facing us:

WE
MAY NOT BE ABLE TO GET TIMELY REGULATORY APPROVAL FOR OUR PRODUCTS AND WE MUST COMPLY WITH REGULATORY REQUIREMENTS TO MANUFACTURE AND MARKET OUR PRODUCTS.

Preclinical
studies and clinical trials, as well as the manufacturing and marketing of our existing and potential products, are subject to extensive regulation and approval by the Health
Products and Food
Branch of Health Canada ("HPFB") and other authorities in Canada and by numerous federal, state and local government authorities in the United States, including the Food and Drug Administration
("FDA"). Similar regulatory requirements exist in Europe and other countries. To the extent we choose to explore foreign markets, we may rely on licensees to obtain regulatory approvals in such
countries. Any failure or delay by us, our collaborators or licensees to comply with applicable requirements or obtain regulatory approvals for our products could adversely affect the marketing of
products developed or licensed by us and our ability to receive product or royalty revenue.

The
regulatory process, which includes preclinical studies and clinical trials of each compound to establish its safety and efficacy, takes many years and requires the expenditure of
substantial resources. Moreover, if regulatory approval of a drug or diagnostic product is granted, such approval may entail limitations on the indicated uses for which it may be marketed. Failure to
comply with applicable regulatory requirements can, among other things, result in suspension of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal
prosecution. Further, government policy may change, and additional government regulations may be established that could prevent or delay regulatory approvals for our products. In addition, a marketed
drug and its manufacturer are subject to continual review. Later discovery of previously unknown problems with the product or manufacturer may result in restrictions on such product or manufacturer,
including withdrawal of the product from the market.

We
manufacture, or expect to manufacture, many active pharmaceutical ingredients and advanced pharmaceutical intermediates that are used in our own and our customers' drug
products.The final drug products in which the pharmaceutical ingredients and advanced pharmaceutical intermediates are used are subject to regulation
for safety and efficacy by the FDA, HPFB and other jurisdictions, as the case may be. Such products must be approved by such agencies before they can be commercially marketed. The process of obtaining
regulatory clearance for marketing is uncertain, costly and time-consuming. We cannot predict how long the necessary regulatory approvals will take or whether our customers will ever
obtain such approval for their products. To the extent that we and/or our customers do not obtain the necessary regulatory approvals for marketing new products, our product sales could be adversely
affected.

Products
manufactured by us will have to comply with the FDA's current Good Manufacturing Practices ("cGMP") and other FDA, HPFB or European guidelines and regulations. Products
containing radioactive isotopes will have to comply with the guidelines and regulations of the Canadian

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Nuclear
Safety Commission in Canada and the Nuclear Regulatory Commission in the U.S. and with other similar regulations in other countries. Additionally, certain of our customers may require us to
adhere to additional manufacturing standards, even if not required by the FDA or other regulatory authorities. Compliance with cGMP regulations requires manufacturers to expend time, money and effort
in production and to maintain precise records and quality control to ensure that the product meets applicable specifications and other requirements. The FDA and other regulators periodically inspect
drug-manufacturing facilities to ensure compliance with applicable cGMP requirements. If we fail to comply with the cGMP requirements, we may become subject to possible regulatory action,
and manufacturing at the facility could consequently be suspended, causing possible loss of profit, regulatory fines and third-party liability. Any one of these events could have a material adverse
effect on our business, financial condition and results of operations.

The
FDA may also require the submission of any lot of a particular product for inspection. If the lot product fails to meet the FDA requirements, then the FDA could take any of the
following actions: (i) restrict the release of the product; (ii) suspend manufacturing of the specific lot of the product; (iii) order a recall of the lot of the product; or
(iv) order a seizure of the lot of the product.

WE
MAY NOT BE ABLE TO OBTAIN AND ENFORCE EFFECTIVE PATENTS TO PROTECT OUR PROPRIETARY RIGHTS FROM USE BY COMPETITORS, AND THE PATENTS OF OTHER PARTIES COULD REQUIRE US TO STOP USING OR
TO ACQUIRE A LICENSE FOR CONDUCTING CERTAIN BUSINESS ACTIVITIES, AND OUR COMPETITIVE POSITION AND PROFITABILITY COULD SUFFER AS A RESULT.

Our
success will depend, in part, on our ability to obtain, enforce and maintain patent protection for our technology in Canada, the United States and other countries. We cannot assure
you that patents will issue from any pending applications or that claims now or in the future, if any, allowed under issued patents will be sufficiently broad to protect our technology. In addition,
no assurance can be given that any patents issued to or licensed by us will not be challenged, invalidated, infringed or circumvented, or that the rights granted thereunder will provide continuing
competitive advantages to us. The patent positions of pharmaceutical and biotechnology firms, including us, are generally uncertain and involve complex legal and factual questions. In addition, we do
not know whether any of our current research endeavors will result in the issuance of patents in Canada, the United States, or elsewhere, or if any patents already issued will provide significant
proprietary protection or will be circumvented or invalidated. Since patent applications in the United States and Canada are maintained in secrecy for at least 18 months from the date of
filing, and since publication of discoveries in the scientific or patent literature tends to lag behind actual discoveries by several months, we cannot be certain that we were the first to create
inventions claimed by pending patent applications or that we were the first to file patent applications for such inventions. Certain patents related to our products have expired. Loss of patent
protection could lead to new competition for these products, and others in
the future, which would materially and adversely affect the financial prospects for these products and, to a lesser extent, the Company.

Our
commercial success will also depend in part on our not infringing patents or proprietary rights of others and not breaching the licenses granted to us. The degree of patent
protection afforded to pharmaceutical or biotechnological inventions around the world is uncertain and varies significantly among different countries. There can be no assurance that we will be able to
obtain a license to any third-party technology or patents that we may require to conduct our business or that such technology or patents can be licensed at a reasonable cost. Failure by us or our
collaborators to obtain a license to any technology or patents that we may need to commercialize our technologies or products may result in delays in marketing our proposed products or the inability
to proceed with the development, manufacture or sale of products requiring such licenses and may have a material adverse effect on us.

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We
have been required to, and may continue to be required to, engage in litigation and other patent proceedings to enforce patents issued to us, to defend our right, title and interest
in patents related to our products and to determine the scope and validity of other parties' proprietary rights. These proceedings can be costly, and if the outcome of any such proceedings is adverse
to us, we could lose the right to sell some of our products or could be required to pay damages.

We
also rely on unpatented trade secrets, improvements and know-how to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality
agreements with our corporate partners, collaborators, employees and consultants. These agreements could be breached, and we may not have adequate remedies for any breach. Further, our trade secrets
could otherwise become known or be independently discovered by competitors.

IF
OUR COLLABORATIVE AND COMMERCIAL RELATIONSHIPS WITH THIRD PARTIES ON WHOM WE RELY ARE UNSUCCESSFUL, OUR BUSINESS MAY SUFFER.

To
be successful, we must continually establish and maintain strategic relationships with leaders in a number of biotechnology and pharmaceutical industry segments. This is critical to
success because such relationships enable us to extend the reach of our products and sales in various jurisdictions, generate additional revenue and develop and deploy new products in various
marketplaces. Entering into strategic relationships is complicated, as some of our current and future strategic partners may decide to compete with us in some or all of the markets or refuse to
fulfill or honor their contractual obligations to us.

We
have entered into a number of product and technology in-licensing and out-licensing arrangements in which our business and financial success is dependent on
third parties. In many of our product and technology in-licensing arrangements, the licensor is responsible for developing a body of data upon which we can base a submission to the HPFB,
FDA or other regulatory authority. The interests of the other party to each of these agreements may not be or remain consistent with our interests, and our collaborators may not succeed in developing
a body of data that can form the basis of regulatory approval. Should our collaborators fail to develop such body of data to enable us to obtain the requisite regulatory approvals or otherwise fail to
honor their commitments to us or meet our expectations, our business, financial condition and results of operations may be materially and adversely affected. In addition, we cannot control the amount
and timing of resources our collaborators devote to the products and technology to which they have rights or to the subject matter of our agreements with them generally. The agreements may be
terminated by our collaborators in certain circumstances.

To
the extent we enter into product out-licensing arrangements for the marketing or distribution of our own products with collaborative partners, any revenues we receive will
depend upon the efforts of third parties. There can be no assurance that any third party will market our products successfully or that any third-party collaboration will be on terms favorable to us.
If any marketing partner does not market a product successfully, our business might be materially and adversely affected.

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

As
at December 31, 2003, the Company's three largest customers represented 41% of our total revenues. The termination by any of these customers of its relationship with us would
have a material adverse effect on our business, financial condition and results of operations unless we could replace those customers in a timely fashion.

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

Our
practice is to require our employees, collaborators, consultants and outside scientific advisors to execute confidentiality agreements upon the commencement of employment or
consulting relationships. These agreements provide that all confidential information developed or made known to the individual during the course of the individual's relationship with us is to be kept
confidential and not disclosed to third parties, subject to certain specific limited exceptions. In the case of employees, the agreements provide that all inventions conceived by the individual shall
be our exclusive property. These
agreements, however, may not provide meaningful protection for our trade secrets or adequate remedies in the event of unauthorized use or disclosure of such information.

WE
ARE SUBJECT TO REGULATION BY GOVERNMENTS IN MANY JURISDICTIONS AND, IF WE DO NOT COMPLY WITH MANUFACTURING, NUCLEAR SAFETY AND ENVIRONMENTAL REGULATIONS, OUR EXISTING AND FUTURE
OPERATIONS MAY BE CURTAILED, AND WE COULD BE SUBJECT TO LIABILITY.

Pharmaceutical
drug manufacturing is a highly regulated industry, requiring significant documentation and validation of manufacturing processes and quality control assurance prior to
approval of the facility to manufacture a specific drug. There can be considerable transition time between the initiation of a contract to manufacture a product and the actual initiation of
manufacture of that product. Any lag time in the initiation of a contract to manufacture a product and the actual initiation of manufacture at our facilities could cause us to lose profits or incur
liabilities.

We
have in place facilities and procedures designed to reduce and, to the extent possible, eliminate the risk of environmental contamination resulting from the processing of raw
materials and, more specifically, from the radiopharmaceutical business of our subsidiary DRAXIMAGE and the manufacturing business of our subsidiary DPI. We also have in place a regular maintenance
program to ensure continued compliance with all applicable environmental regulations.

Canadian
and U.S. federal, state, local and provincial regulations govern extensively the use, manufacture, storage, handling, transport and disposal of hazardous material and associated
waste products. Although we believe that the operations at our facilities comply in all material respects with the applicable environmental laws in Canada and the United States, we cannot completely
eliminate the risk of substantial environmental liabilities. Any failure by us or any of our subsidiaries to comply with the present or future environmental laws in Canada, the United States or
elsewhere could result in any of the following: (i) cessation of portions or all of our or our subsidiaries' operations; (ii) imposition of fines; (iii) restrictions on our or our
subsidiaries' ability to carry on or expand our operations; (iv) significant expenditures by us in order to comply with environmental laws and regulations; or (v) liabilities in excess
of our resources. Any of these sanctions could have a material adverse effect on our business, financial condition and results of operations.

OUR
BUSINESS COULD BE HARMED IF THERE WERE A DISPUTE OR DISRUPTION WITH OUR UNIONIZED EMPLOYEES.

Although
a five-year collective agreement was ratified in February 2004 with the United Food & Commercial Workers International Union, Local 291
(AFL-CIO), there can be no assurance that future labor difficulties will not arise. Should such difficulties arise which lead to significant grievance issues and/or a labor strike, such
events might have a material adverse effect on our business.

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FACTORS
BEYOND OUR CONTROL COULD CAUSE INTERRUPTION IN OUR OPERATIONS, WHICH WOULD ADVERSELY AFFECT OUR REPUTATION IN THE MARKETPLACE AND OUR RESULTS OF OPERATIONS.

To
succeed, we must be able to operate our manufacturing facilities without interruption and deliver radiopharmaceutical and contract manufacturing products in a timely manner. We could
suffer an interruption caused by damage from a variety of sources, many of which are not within our control, including fire, flood, earthquake and other natural disasters; power loss and
telecommunication failure; disruption to transportation systems; equipment or machinery failure; software and hardware errors, failures or crashes and similar disruptions; or undue delays or
restrictions with air transport systems and cross-border shipments. Any significant interruptions in our operations or our ability to deliver time-sensitive products would damage our
reputation in the marketplace and have a negative impact on our results of operations.

ALTHOUGH
WE CARRY INSURANCE, A SUCCESSFUL LIABILITY CLAIM COULD NEGATIVELY IMPACT OUR BUSINESS.

The
use of any of our unapproved products under development and the sale of any approved products may expose us to liability claims resulting from the use of these products. Such claims
might be made directly by consumers, healthcare providers or pharmaceutical companies or others selling such products. We currently have liability insurance, but we cannot provide assurance that we
will be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to this potential liability. We might not be able to maintain or obtain
additional commercially reasonable product liability insurance for any products approved for marketing. A successful product liability claim or a series of claims brought against us could have a
material adverse effect on our business, financial condition or results of operations. Even unsuccessful product liability claims could result in the expenditure of funds in litigation and the
diversion of management time and resources and could damage our reputation and impair the marketability of our products.

IF
THE MARKET DOES NOT ACCEPT OUR PRODUCTS, OUR BUSINESS COULD BE HARMED.

There
can be no assurance that any of our products in development or products recently launched will achieve market acceptance. The degree of market acceptance will depend upon a number
of factors, including the receipt of regulatory approvals, the establishment and demonstration in the medical community of the clinical efficacy and safety of the products, the establishment and
demonstration of the potential advantages over existing and new diagnostic and treatment methods and the reimbursement policies of government and third-party payors. There can be no assurance that
physicians, patients, payors or the medical community in general will accept and utilize any existing or new products that may be developed or manufactured by us.

We
anticipate that we will face increased competition in the future as new products enter the market and advanced technologies become available. There can be no assurance that existing
products or new products developed by our competitors will not be more effective, or be more effectively marketed and sold, than any that may be developed or sold by us. Competitive products may
render our products obsolete and uncompetitive prior to recovering research, development or commercialization expenses incurred with respect to any such products.

Many
of our existing or potential competitors, particularly large pharmaceutical companies, have substantially greater financial, technical and human resources than do we. 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
and manufacturing and marketing such products. Accordingly, our competitors may succeed in commercializing products more

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rapidly
or effectively, which could have a material adverse effect on our business, financial condition or results of operations.

FAILURE
OF ONE OF OUR CURRENT OR FUTURE CLINICAL TRIALS COULD HAVE A MATERIALLY NEGATIVE IMPACT ON OUR FUTURE PROSPECTS.

The
development of new products is subject to a number of significant risks. Potential products that appear to be promising in various stages of development may not reach the market for
a number of reasons. Such reasons include the possibility that the potential product will be found ineffective or unduly toxic during preclinical or clinical trials, fail to receive necessary
regulatory approvals, be difficult to manufacture on a large scale, be uneconomical to market or not achieve market acceptance, or be precluded from commercialization by proprietary rights of third
parties. Certain products we are attempting to develop have never been manufactured on a commercial scale, and there can be no assurance that such products can be manufactured at a cost or in a
quantity to render such products commercially viable. Production of such products may require the development of new manufacturing technologies and expertise. The impact on our business in the event
that new manufacturing technologies and expertise would have to be developed is uncertain. Many of our potential products will require significant additional research and development efforts and
significant additional preclinical
and clinical testing prior to any commercial use. There can be no assurance that we will successfully meet any of these technological challenges or others that may arise in the course of development.

Before
obtaining regulatory approval for the commercial sale of any product under development, we must demonstrate through preclinical studies and clinical trials that the product is
safe and efficacious. The results of preclinical studies and early-stage clinical trials may not be totally predictive of results obtained in larger late-stage clinical trials, and there
can be no assurance that our or any collaborators' clinical trials will demonstrate safety and efficacy, achieve regulatory approvals or result in marketable products. A number of companies in the
biotechnology and pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after achieving promising results in earlier trials. Failure to successfully complete
clinical trials on a timely and cost-effective basis could have an adverse effect on our future business, financial condition and results of operations.

OUR
PROFIT DEPENDS IN PART ON REIMBURSEMENT POLICIES AND REGULATIONS OF GOVERNMENT HEALTH ADMINISTRATION AUTHORITIES, PRIVATE HEALTH INSURERS AND OTHER ORGANIZATIONS.

The
business and financial condition of pharmaceutical companies will continue to be affected by the efforts of governments and third-party payors to contain or reduce the costs of
healthcare through various means. For example, in certain markets, including Canada, pricing or profitability of prescription pharmaceuticals, medical devices and diagnostic products is subject to
government control. In the United States there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar government controls. In addition,
an increasing emphasis on managed healthcare in the United States has increased and will continue to increase the pressure on pharmaceutical pricing. While we cannot predict whether such legislative
or regulatory proposals will be adopted or the effects such proposals or managed care efforts may have on our business, the announcement and/or adoption of such proposals or efforts could have a
material adverse effect on our business and financial condition and that of our current and prospective corporate partners. Accordingly, our ability to establish strategic alliances may be adversely
affected. In addition, in Canada, the United States and elsewhere, sales of prescription pharmaceutical products and radiopharmaceutical products are dependent, in part, on the availability of
reimbursement to the consumer from third-party payors, such as government and private insurance plans. Third-party payors are increasingly challenging the prices charged for medical products and
services. To the extent we succeed in bringing new products to market, there can be no assurance that these products will be considered cost-effective and that reimbursement to consumers
will be available or will be sufficient to

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allow
the sale of these products on a competitive basis. The Patented Medicine Prices Review Board, which monitors and controls prices of patented drug products marketed in Canada, may assert
jurisdiction over our products under development which may limit the prices that can be charged for such products. We may not be able to obtain prices for our products under development that will make
them commercially viable.

OUR
FUTURE SUCCESS DEPENDS ON OUR ABILITY TO GROW, AND IF WE ARE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY, WE MAY INCUR UNEXPECTED EXPENSES AND BE UNABLE TO MEET OUR CUSTOMERS'
REQUIREMENTS.

We
will need to maintain, expand and upgrade our manufacturing facilities and operations to execute current commercial obligations to customers, widen our customer base and increase
manufacturing efficiencies over the next few years. We cannot be certain that DPI will be able to enter into enough lucrative third-party contracts to increase its profitability. If we do secure
advantageous agreements, we cannot be certain that our employees, systems, procedures, controls, productive capacity and existing space will be adequate to support expansion of its operations. Our
future operating results will depend on the ability of our officers and key employees to manage changing business conditions and to implement and improve our technical, administrative, financial
control and reporting systems and operational excellence in order to achieve established business objectives. An unexpectedly large increase in the volume of manufacturing business or the number of
orders placed by customers may require us to expand capacity and further upgrade our facilities and the technology related to our manufacturing. We may not be able to project the rate of timing of
such increases or customer demands accurately or to expand and upgrade our facilities and supporting systems and infrastructure to accommodate such increases. Difficulties in managing future growth
and meeting customers' expanded requirements could have a significant negative impact on our business and its profitability.

OUR
FINANCIAL RESULTS MAY FLUCTUATE, AND OUR FUTURE REVENUE AND PROFITABILITY ARE UNCERTAIN.

Our
ability to achieve and maintain profitability in the foreseeable future depends on the commercial success of our products and services. Because we will be launching or are in the
process of launching new products in new markets, revenues are difficult to predict and may fluctuate substantially from period to period. In addition, product development programs will require
substantial additional investment, including the cost of clinical trials, obtaining additional regulatory approvals, if necessary, and marketing and sales expenses associated with potential new
product introductions. Our manufacturing facilities will continue to require capital investment in order to maintain, upgrade and expand their operations. The success of our subsidiaries DRAXIMAGE and
DPI will rely significantly on the ability of both companies to maintain and to increase substantially their manufacturing capabilities to satisfy customer demand. There can be no assurance that, or
when, we will successfully develop, receive regulatory approvals for, or manufacture or market any new products for our own marketing purposes or for third parties. DPI may fail to secure sufficiently
lucrative third-party manufacturing contracts to increase its profitability. The research, development, production and marketing of new products will require the application of considerable technical
and financial resources by us and our collaborators, while revenues that are generated by such products, if successfully developed and marketed, may not be realized for several years. We may not be
able to sustain profitability. We may require external financing to complete certain aspects of our strategic plan, and external sources of capital may not be available at an acceptable cost.

IF
WE CANNOT ADAPT TO CHANGING TECHNOLOGIES, OUR PRODUCTS AND SERVICES MAY BECOME OBSOLETE AND OUR BUSINESS COULD SUFFER.

Because
the biotechnology and pharmaceutical industry is characterized by rapid technology change and obsolescence, we may be unable to anticipate changes in our current and potential
customer requirements that could make our existing technology obsolete. Our success will depend, in

9

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part,
on our ability to continue to enhance our existing products and services, develop new technology that addresses the increasing sophistication and varied needs of our respective customers,
license leading technologies and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis. The development of our proprietary
technology and investing in certain niche markets entails significant technical and business risks. We may not be successful in using our new technologies or exploiting our niche markets effectively
or adapting our businesses to evolving customer requirements or emerging industry standards.

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

The
market prices for the securities of pharmaceutical and biotechnology companies, including ours, have historically been highly volatile, and the market has, from time to time,
experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. Factors such as fluctuations in our operating results, announcements of
competing technological innovations or new therapeutic products by our competitors, clinical trial results, governmental regulation, developments in patent or other proprietary rights, public concern
as to the safety of drugs developed by us or others and general market conditions can have an adverse effect on the market price of our shares. In particular, the realization of any of the risks
described herein could have a material adverse impact on such market price. Sales of substantial amounts of our shares in the public market, or the perception that such sales will occur, could also
adversely affect the market price of our shares and make it more difficult in the future for us to raise funds through equity offerings.

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

A
substantial portion of our revenues are now, and are expected to continue to be, realized in US dollars. Our operating expenses are primarily paid in Canadian dollars. Material
fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar may have a material effect on our results of operations. In particular, we may be adversely affected by a significant
and rapid strengthening of the Canadian dollar against the U.S. dollar. We do not currently use derivative instruments to hedge our foreign exchange risk and currently have no plans to do so in the
near future.

IF
WE LOSE THE SERVICES OF KEY PERSONNEL, WE MAY BE UNABLE TO REPLACE THEM, AND OUR BUSINESS COULD BE NEGATIVELY AFFECTED.

Our
success depends on the retention of principal members of our management and scientific staff and on our ability to continue to attract, motivate and retain additional key personnel.
The market for retaining and obtaining such key personnel is intensely competitive, and the loss of the services of key personnel or the failure to recruit necessary replacement and additional
personnel in a timely manner could materially and adversely affect operations and our research and development efforts.

ALTHOUGH
WE CONSIDER THE COMPANY TO HAVE GOOD DEFENSES TO SUCH ACTION, SHOULD CURRENT LAWSUIT AGAINST US SUCCEED, WE COULD INCUR A SUBSTANTIAL LOSS.

While
we believe the Company has good defenses to the Knoll proceeding (see "Legal/Arbitration Proceedings" under Item 8), this dispute may not be resolved in our favor. It is possible
that a court or arbitration tribunal may find us to be in breach of certain agreements, or of infringing validly issued patents of third parties or practicing the intellectual property of others. In
that event, in addition to the cost of defending the underlying proceeding, we may have to pay license fees, additional royalties and/or damages and may be ordered to assign certain Anipryl®-related
patents and be prohibited from conducting certain activities. Under such circumstances, we could incur substantial loss and
our business could be negatively affected.

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IF
INTEREST RATES INCREASE MATERIALLY, OUR INTEREST EXPENSE COULD INCREASE MATERIALLY, AND OUR RESULTS OF OPERATIONS COULD BE NEGATIVELY AFFECTED.

All
of the Company's third-party debt is based on a variable interest rate. Any material changes to interest rates could result in materially increased interest expense and decreased
results of operations.

Item 4. Information on the Company

DRAXIS is a specialty pharmaceutical company with core competencies in two segments: the development, production, marketing and distribution of
radiopharmaceuticals through DRAXIMAGE and the provision of contract pharmaceutical manufacturing services, specializing in liquid and freeze-
dried injectables and other sterile products through DPI. The Company believes that both DRAXIMAGE and DPI have significant long-term growth potential and has invested considerable
financial and management resources in developing these businesses.

In
addition, DRAXIS has continuing financial interests associated with its collaboration agreements with Pfizer Inc. with respect to Anipryl®, GlaxoSmithKline ("GSK") with respect to the
SpectroPharm line of dermatology products, and Shire BioChem Inc. ("Shire")
with respect to Canadian sales of products divested in 2003.

The
Company's consolidated operations are integrated across research, product development, manufacturing, sales and marketing, as well as the in-licensing and commercial
development of pharmaceutical products and technologies.

DRAXIS
is currently emerging from a transitional phase of its development. Previously, the Company was reliant on income earned from Anipryl®. For the year ended December 31, 2003, the Company's
collaboration agreement with respect to Anipryl®represented a significant but not primary source of the Company's income. In the near term, the Company expects to continue to
lessen this reliance as it develops a diversified profit base from its other business units. In particular, the Company expects radiopharmaceuticals and contract manufacturing to remain major sources
of longer-term revenue and earnings.

The
common shares of DRAXIS are listed on the Toronto Stock Exchange (ticker symbol DAX) and on NASDAQ (ticker symbol DRAX).

The
Company's registered and head office is located at 6870 Goreway Drive, 2nd Floor, Mississauga, Ontario, Canada L4V 1P1. Telephone:
(905) 677-5500. Fax: (905) 677-5494.

The
Company's manufacturing, research and development facilities are located at 16751 Trans-Canada Road, Kirkland, Quebec, Canada H9H 4J4.

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

History and Development of the Company

The Company was incorporated under the name Deprenyl Research Limited on October 13, 1987 under the Canada Business Corporations Act. The Company was
founded principally to engage in the marketing in Canada of prescription pharmaceuticals discovered, developed or acquired by Chinoin Pharmaceutical and Chemical Works Co., Ltd., the first of
which wasEldepryl®(selegiline; 1-deprenyl), for the treatment of Parkinson's disease. The Company changed its name to DRAXIS
Health Inc. in May 1994.

The
Company completed an initial public offering of its common shares in February 1988.

Beginning
in 1990, the Company expanded on its knowledge and experience with selegiline by initiating directly on its own behalf, as well as through contract research arrangements,
studies designed

11

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to
investigate the potential of selegiline for companion animal use. This initiative ultimately resulted in the formation of its subsidiary DAHI, through which the Company developed and commercialized
a companion animal health product,Anipryl®.

In
1991 the Company began to invest in the applications of aminolevulinic acid photodynamic therapy, which resulted in the formation of a subsidiary, DUSA Pharmaceuticals, Inc.
("DUSA"). Through a series of transactions from 1991 to 1996, the Company divested all of its interest in DUSA.

By
late 1992, the Company faced considerable uncertainty due to the impending threat of generic competition forEldepryl®which, at that time, still accounted for almost 100% of the Company's revenues. Faced with this as well as other business challenges, in 1992 the Company began the process of recruiting new senior
management to develop and implement a new strategic business plan for the Company to (i) address the generic threat to its lead drug by expanding and diversifying its established Canadian
pharmaceuticals franchise; (ii) strengthen the Company's financial position; and (iii) diversify from its historical Canadian base through the acquisition of niche pharmaceutical
products and/or manufacturing-oriented businesses with international growth potential.

Since
1993, the Company implemented the following corporate development initiatives:

Canadian
Pharmaceuticals



Financial
Position



Diversification



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Beginning
in 1998, the Company embarked on a capital expansion plan for construction of the Company's new lyophilization line, the construction of radiopharmaceutical manufacturing
facilities and the subsequent expansion of the radiopharmaceutical operation.

In
late 1999 and early 2000, the Company undertook a strategic review of its operations from the perspective of enhancing shareholder value. As a result of this review, the Company
resolved to focus its financial and management resources on its radiopharmaceutical and contract manufacturing businesses.

During
2000, the Company divested its dermatology product lines for aggregate proceeds of $9.0 million. The largest transaction in this regard was the sale of the
SpectroPharm®line of products to Block Drug Company (Canada) Limited (now part of GlaxoSmithKline Consumer Healthcare).

In
February 2000, the Company established a strategic alliance with SGF Santé Inc. ("SGF") with the sale of a 34.1% equity interest in DPI to SGF and certain
members of DPI's management team.

During
2001, the Company received U.S. and Canadian regulatory approvals for the expanded radiopharmaceutical manufacturing facility and FDA acceptance to manufacture sterile lyophilized
and sterile injectable products.

In
March 2001, the Company in-licensedINFECTON®, a Technetium 99m-based radiopharmaceutical for imaging
infection.

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Also during 2001, DRAXIMAGE launchedBrachySeed® I-125 in the U.S. and Canada and received regulatory approvals in
the U.S. and Canada forBrachySeed® Pd-103.

In
2001, the Company further implemented its strategic plan by (i) initiating the production of Bracco Diagnostic Inc.'s sodium iodide I-131 radiotherapy
capsules; (ii) signing a long-term supply agreement to manufacture several GSK predominantly sterile products for multiple international markets; and (iii) amending the Anipryl®licensing
agreement with Pfizer resulting in a $3.1 million cash payment to the Company plus return of product rights
outside of North America.

During
2002, the Company achieved improved financial results from continuing operations. The Company also received several regulatory approvals, including (i) U.S. and Canadian
approval to transfer production of DRAXIMAGE's line of lyophilized medical imaging products to the Company's own production facility, (ii) U.S. approval to commence production at DPI of an
established injectable product for GlaxoSmithKline for the U.S. market and (iii) U.S. approval to manufacture solid dosage form products at DPI. In 2002, the Company also realigned its U.S.
sales and marketing strategy forBrachySeed®, the Company's proprietary radioactive brachytherapy implant.

During
2003, the Company achieved a number of significant accomplishments, including:



In
2003, the Company announced the realignment of its executive management team to reflect the growing importance of its core operating businesses in Montreal. The significant elements
of the realignment, which were effective July 1, 2003, are as follows: (i) the departure of Jim Garner as Senior

14

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Vice
President Finance and Chief Financial Officer; (ii) the promotion of Mark Oleksiw, previously Director of Finance, to the office of the Chief Financial Officer; (iii) the promotion
to Senior Vice-President, Corporate Development and Strategic Planning of Dan Brazier, who was formerly President of DRAXIS Pharmaceutica; (iv) the promotion to
Vice-President Finance of Mr. Chien Huang. In October 2003, the Company appointed Alida Gualtieri to the position of General Counsel and Corporate Secretary to replace Doug
Parker, who left the Company on December 1 to join an outside law firm. Mr. Oleksiw and Ms. Gualtieri are primarily located at the Company's Montreal offices.

On
April 22, 2004, DRAXIS issued 3,053,436 units of the Company at a purchase price of $4.82 (CDN$6.55) per unit, for aggregate gross proceeds of approximately
$14.7 million (CDN$20 million). DRAXIS granted the underwriters an over-allotment option to purchase up to an additional 458,016 units, exercisable at the issue price any
time up to 30 days following closing of the offering, representing additional gross proceeds of up to $2.2 million (CDN$3 million). Each unit consists of one common share of
DRAXIS and one-half of one share purchase warrant. Each whole warrant entitles the holder to acquire one common share of the Company at a price of CDN$8.50 at any time up to
April 24, 2006.

On
April 22, 2004, DRAXIS acquired SGF's 32.7% interest in DPI for cash consideration of $9.6 million (CDN$13 million). DRAXIS used part of the proceeds from the
offering completed in April 2004 to pay for the acquisition and to repay $3.1 million (CDN$4.2 million) in debt owed by DPI to SGF and $1.7 million (CDN$2.3 million)
in debt owed by DPI to Investissement Québec.

For
information concerning the Company's capital expenditures and methods of financing, please see Item 5: Operating and Financial Review and Prospects.

Business Strategy

The Company believes that both DRAXIMAGE and DPI have significant long-term growth potential and has invested considerable financial and management
resources in developing these businesses, including:



These
initiatives are consistent with the Company's general business strategy to:



15

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The
Company's primary operational focus in 2004 will continue to be on: (i) improving near-term financial and operational performance of its radiopharmaceutical and
manufacturing businesses through increasing sales of existing products and services, improving manufacturing efficiency and effectiveness, and obtaining regulatory approvals; and (ii) securing
and advancing its base for long-term growth through the development of its existing product pipeline as well as identifying and capitalizing on additional new business opportunities that
are consistent with the Company's capabilities and that contribute to the long-term value of the Company.

Consistent
with this strategic focus, the Company divested its dermatology product lines in 2001 and in 2003 completed the sale of its Canadian prescription pharmaceutical sales and
marketing business, DRAXIS Pharmaceutica. The Company also realigned its senior management responsibilities in 2003 to focus on its core businesses. The positive progress made by both the
radiopharmaceutical and contract manufacturing business is highlighted by the improved operating results of these core businesses and improved cash flows of the Company in 2003.

A
description of the principal markets in which the Company operates and a breakdown of total revenues by segment and geographic market for the three most recent financial years is
included in Note 21 of the Company's Consolidated Financial Statements and Notes beginning on page F-1.

The
Company's two main operating businesses, radiopharmaceuticals and pharmaceutical contract manufacturing, are not characterized by significant seasonality. Plant operations for DPI,
however, are generally reduced or shut down once a year for approximately two to four weeks in order to conduct regular required maintenance of facilities.

DRAXIMAGE's
principal raw materials are radioactive isotopes that are used to label other compounds that act as carriers or molecular targeting agents. The isotopes are obtained from
companies and agencies that are licensed by governmental regulators to produce purified radioactive chemicals. Radioactive materials, by their nature, decay over timesome rapidly and some
more slowly, depending on specific isotopes. Therefore, DRAXIMAGE receives shipments of chemical-grade

16

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radioisotopes
several times each week and converts these to finished products within days or weeks. While prices of selected isotopes can be somewhat volatile over the medium term, DRAXIMAGE endeavors
to negotiate long-term supply contracts with appropriate suppliers, especially for the more important isotopes such as radioactive Iodine.

DPI,
as a manufacturer of pharmaceutical products, obtains its chemical raw materials from approved chemical suppliers of both active pharmaceutical ingredients ("API") and inactive or
excipient ingredients such as fillers, stabilizers, preservative agents and coloring agents. In some instances the API is supplied by the customer. DPI conducts full quality control testing of all
ingredients and packaging materials before they are incorporated into the finished product. Prices of principal API are not generally volatile, although prices can vary between alternative suppliers.

Radiopharmaceuticals

DRAXIMAGE discovers, develops, manufactures, and markets diagnostic imaging and therapeutic radiopharmaceutical products for the global nuclear medicine
marketplace. Nuclear medicine entails the use of radioactive agents (radiopharmaceuticals) for imaging and therapeutic purposes. The energy released as these products decay can be harnessed to:
(i) elicit a visual representation of various organs and tissues (nuclear imaging), or (ii) destroy cancerous cells (radiotherapy). Products currently marketed by DRAXIMAGE include a
line of lyophilized Technetium-99m kits used in nuclear imaging procedures, a line of imaging and therapeutic products labeled with a variety of isotopes, including radioiodine, and BrachySeed®,
Iodine-125 brachytherapy implants. DRAXIMAGE also has a number of products in development, including three
Technetium-99m-based diagnostic imaging products:FIBRIMAGE®, for imaging deep-vein thrombosis, currently in Phase
III clinical trials;INFECTON®, for imaging infection, currently in Phase II; and AMISCAN, for the early diagnosis of acute myocardial infarct,
currently in Phase II clinical trials.

Founded
in 1950 as a division of Charles E. Frosst & Co., the predecessor business to DRAXIMAGE pioneered and became a leader in the medical application of nuclear technology
after assuming the development function from Atomic Energy of Canada Ltd. Following the 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 DRAXIS in 1997. As part of the acquisition, the Company retained all of
the business's managers, scientists and employees as well as its existing products and intellectual property.

The
acquisition of this business was consistent with the Company's strategy of acquiring specialty pharmaceutical platforms with potential for expansion into global markets. DRAXIMAGE is
the only company that manufactures radiopharmaceuticals in Canada.

DRAXIMAGE
and its predecessor have a long history of technological and scientific progress in the field of radiopharmaceuticals. Notable achievements include the development of
lyophilized kits for the in-situ preparation of Technetium-99m ("Tc-99m") radiopharmaceutical products for nuclear medical imaging ("Tc-99m Kits"); the
development of chelates for the indium/yttrium and Technetium/rhenium groups of metals; and the development of stabilizers for use in iodinated radiopharmaceuticals, which resulted in DRAXIMAGE being
one of the few companies to market iodinated products that do not require refrigeration.

Key
business development transactions involving DRAXIMAGE have included:



17

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DRAXIMAGE's
growth strategy is to leverage its history and experience in the research, development, manufacture and distribution of radiopharmaceutical products and services and to
capitalize on its manufacturing capabilities. In particular, DRAXIMAGE's business strategy includes:



Overview of Radiopharmaceuticals

The medical specialty of nuclear medicine involves the use of short-lived radioisotopes for both diagnostic imaging and therapeutic applications. Pharmaceutical
products used in such applications are commonly called radiopharmaceuticals. Radiopharmaceuticals represent a well-defined, growing niche market with high barriers to entry, including
regulatory approval, specialized manufacturing standards, access to supply and critical delivery logistics.

Frost
and Sullivan, a pharmaceutical industry consulting firm, estimates that the U.S. radiopharmaceuticals market will continue to demonstrate double-digit growth rates. The total U.S.
market reached more than $900 million in 2001 with over 80% of revenues from the diagnostics sector,

18

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strongly
led by cardiology diagnostics. Total diagnostic procedures performed in the U.S. reached nearly 16 million in 2002, with an estimated 90% of dosages being distributed through
radiopharmacies. Frost and Sullivan forecasts that the U.S. diagnostic radiopharmaceuticals market could reach more than $1 billion by 2004 and that the total U.S. radiopharmaceuticals market
could grow to exceed $1.6 billion by the end of 2006.



The diagnostic imaging applications of nuclear medicine normally involve the intravenous administration of a radiopharmaceutical consisting of a targeting
molecule that has a particular binding affinity for a specific organ or tissue linked to a low intensity, short-lived, gamma-emitting radioisotope such as Tc-99m. Following administration,
the radiopharmaceutical with its radioactive isotope concentrates at the biological target, which is then imaged using a scanning device such as a gamma camera. A gamma camera consists of a
scintillation crystal which, when placed over a region of the body, is capable of detecting gamma rays emitted by radionuclides in underlying tissues. This imaging modality is also referred to as
gamma scintigraphy. The gamma camera and its associated computerized peripheral devices accurately measure the radiation being emitted by the radioisotope and so provide both a visual picture of the
target and quantitative data concerning the distribution of radioactivity.

A
nuclear medicine image provides both static and functional, or dynamic, information about a biological target, thereby revealing functional and morphological information normally
unobtainable by
other imaging techniques such 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 medical procedures with many years of safe and effective use. Most procedures are non-invasive, are performed
with a minimum of discomfort and inconvenience to the patient and are normally less costly and involve less risk than newer high-tech alternative techniques.

In
the U.S., it is estimated by the Nuclear Medicine Industry Association that one in three hospital stays involves at least one nuclear medicine procedure, aggregating in excess of
40,000 such procedures per day, 80-90% of which involve the use of Tc-99m as the radioactive isotope.



Increasingly, therapeutic radiopharmaceuticals are being used and new products are being developed for the treatment of disease, particularly for the treatment of
various cancers. Examples of currently marketed therapeutic radiopharmaceuticals include:



New
generations of anti-cancer agents based on targeting molecules such as peptides, proteins, metabolites and monoclonal antibodies that have binding affinities to the
surface of cancerous cells are being developed to be linked to 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, thus bound, will permit the delivery of therapeutic quantities of radiation
directly to malignant cells.

Proprietary
technology and know-how within DRAXIMAGE are particularly applicable to the discovery and development of the new generations of innovative radiotherapeutic
products. The

19

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Company
is currently in clinical development ofFIBRIMAGE® andINFECTON® plus
preclinical development of Somatostatin Therapy, which is being developed for the treatment of neuroendocrine tumors, lymphoma and carcinoid and small-cell lung cancer.

Competition

The radiopharmaceutical field is highly specialized, and there are significant barriers to entry, especially in the therapeutic area. The barriers include meeting
pharmaceutical product and nuclear regulatory requirements, having the ability to handle radioactive materials and establishing facilities and procedures to manufacture in a sterile lyophilized or
freeze-dried form, which involves manufacturing standards higher than those typically employed for most pharmaceutical products. In addition, manufacturing and distribution logistics systems must be
well-integrated and supportive to ensure that radiopharmaceutical products can be produced rapidly and delivered to the end user in a timely manner with the prescribed level of strength.

Companies
with significant radiopharmaceutical operations include Bristol-Myers Squibb Company, Amersham plc, Tyco International Ltd., Schering AG, and Bracco SpA. In addition,
there are a number of companies that are developing and/or marketing other radiopharmaceutical products, including MDS Nordion Inc., Immunomedics, Inc., Biogen Idec Inc. and NeoRx
Corporation.

BrachySeed® implants are sold into a competitive marketplace that includes the established market leader, Amersham plc. Other
competitors in the U.S. market include Theragenics Corporation, North American Scientific, Inc., Mentor Corporation and Best Medical International.

Marketed Products

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



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

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The
following table summarizes DRAXIMAGE's radioactive products.

|Product              |                                                                                           | Indication |                                        | Principal
Markets
|-------------------- | ----------------------------------------------------------------------------------------- | ---------- | -------------------------------------- | -----------------
|Imaging Products     |                                                                                           |            |                                        |                  
|                     | 51Cr-Chromic Chloride Injection                                                           |            | Diagnosis of gastroenteropathy         |                  
|                     | 51Cr-Sodium Chromate Injection, USP                                                       |            | Measurement of blood volume            |                  
|                     | 57Co-Cyanocobalamin Capsule USP                                                           |            | Diagnosis of Vitamin-B12 malabsorption |                  
|                     | 57Co-Cyanocobalamin Solution USP                                                          |            | Diagnosis of Vitamin-B12 malabsorption |                  
|                     | 57Co-Standard Cobalt Reference Solution                                                   |            | Reference for57Co-Cyanocobalamin       |                  
|                     | 111In-Diethylene Triamine Pentacetic Acid Injection (DTPA)                                |            | Cisternography                         |                  
|                     | 111In-Indium Chloride Sterile Solution                                                    |            | Labeling of peptides and antibodies    |                  
|                     | 131I-Sodium Iodide Diagnostic Capsules and Solutions, Oral and Intravenous                |            | Imaging of thyroid disorders           |                  
|                     | 131I-metaIodobenzylguanidine                                                              |            | Adrenal imaging                        |                  
|                     | 131I-Iodinated Serum Albumin Injection, USP                                               |            | Measurement of blood and plasma volume |                  
|                     | 131I-Iodohippuric Sodium Injection, USP                                                   |            | Measurement of renal plasma flow       |                  
|                     | 125I-Iodinated Albumin Injection, USP                                                     |            | Measurement of blood and plasma volume |                  
|                     | 133Xe-Xenon Gas                                                                           |            | Lung ventilation studies               |                  
|Therapeutic Products |                                                                                           |            |                                        |                  
|                     | 125IBrachySeed®                                                                           |            | Treatment of various localized cancers |                  
|                     | 103PdBrachySeed®                                                                          |            | Treatment of various localized cancers |                  
|                     | 131I-Sodium Iodide Therapeutic Capsules and Solutions, Oral and Intravenous               |            | Treatment of thyroid disorders         |                  
|                     | Kit for the Preparation of Sodium Iodide I-131 Capsules and Solution USP TherapeuticOral |            | Treatment of thyroid disorders         |                  
|                     | 131I-meta-Iodobenzylguanidine (MIBG)                                                      |            | Treatment of neuroblastoma             |                  
|                     | 32P-Sodium Phosphate Solution, USP                                                        |            | Treatment of bone pain                 |                  
|Other                |                                                                                           |            |                                        | Canada           
|                     | 131I-Sodium Iodine SolutionChemical                                                      |            | Radiochemical synthesis                |                  
|                     | 125I-Sodium Iodide SolutionChemical                                                      |            | Radiochemical synthesis                |                  
|                     | 131I-Iodinated Human Serum Albumin                                                        |            | Radiochemical                          |                  
|                     | 125I-Iodinated Human Serum Albumin                                                        |            | Radiochemical                          |                  

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During the second half of 2001, DRAXIMAGE entered into a third-party manufacturing contract to supply sodium iodide I-131 radiotherapy capsules for
Bracco Diagnostics Inc. for the U.S. market for the treatment of thyroid cancer and hyperparathyroidism.

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



BrachySeed® is a uniquely designed, second-generation radioactive brachytherapy implant developed by
DRAXIMAGE. The unique design ofBrachySeed® brings a high level of accuracy, precision and safety to sealed source implant surgery. Each BrachySeed® is robotically manufactured at the DRAXIMAGE facility.

One
of the key segments of the radiopharmaceuticals market is brachytherapythe implantation of radioactive "seeds" for the treatment of localized cancers of the prostate and
other organs. These seeds can contain either Iodine-125 or Palladium-103, depending on the status of the cancer and the required duration of treatment. The seeds deliver a
concentrated, defined radiation dose that destroys cancer cells while minimizing damage to surrounding tissues. This targeted strategy is particularly important for organs such as the prostate, which
is nestled between the bladder and the rectum. The procedure involves placement of approximately 100-150 of these seeds into a locally anesthetized patient.

DRAXIMAGE's
Iodine-125 implant was approved by the FDA in the second half of 2000 and launched into the Canadian and U.S. markets during the second quarter of 2001. The
Palladium-103 product was approved by the FDA in the fourth quarter of 2001 and launched during the second quarter of 2002, but shipments were subsequently suspended pending development of
a revised marketing strategy. The Palladium-103 product was not marketed during 2003. The Palladium isotope releases its energy over a shorter span of time, and tends to be used in the
treatment of more aggressive cancers. DRAXIS' brachytherapy seed utilizes a patented design that delivers a more uniform distribution of radiation than its competitors' products, which can result in
the use of relatively fewerBrachySeed® implants per procedure.

In
early 2003, DRAXIMAGE implemented a strategy to market brachytherapy products directly to U.S. customers by drawing on the expertise and resources of its established customer service
system, following the ending of license, distribution and supply agreements with Cytogen Corporation. The move to the end user marketing of brachytherapy implants is part of a trend that has become
evident throughout the brachytherapy industry. This trend is in part the result of the enactment of the U.S. Medicare Prescription Drug Improvement and Modernization Act of 2003. This law provides for
separate payment for brachytherapy seeds and removes restrictive monetary caps on brachytherapy seed reimbursement under Medicare's Hospital Outpatient Prospective Payment System, also known as
"HOPPS." In January 2003 the U.S. Center for Medicare and Medicaid Services (CMS) changed its reimbursement policy in accordance with the change in the law, to provide that the fee for a
prostate cancer treatment procedure includes the cost of implants. DRAXIMAGE established and has maintained a direct brachytherapy marketing and sales group, including product management,
in-house

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sales/telemarketing,
customer service support, secure website ordering and sales representatives in the U.S.

In
addition, DRAXIMAGE is developingBrachySeed® product enhancements to support expanded sales of BrachySeed®. Examples of such value-added
enhancements include pre-sterilization of BrachySeed® implants and delivery ofBrachySeed® in pre-loaded
needles and cartridges.

DRAXIMAGE
believes thatBrachySeed® offers important advantages over its competitors, including:



The
nearly spherical dispersion of the radiation field provides a more uniform dosimetry to reduce "cold spots," areas within the target organ not reached by the radiation. Such "cold
spots" may occur when brachytherapy seeds do not provide symmetrical and spherical fields of radiation. This also permits the implantation of 8 - 10% fewer seeds to achieve
the same dosimetry.

In
2002, DRAXIMAGE became the exclusive Canadian distributor for Mick Radio-Nuclear Instruments, Inc., the leading manufacturer of brachytherapy equipment.



DRAXIMAGE currently markets the following non-radioactive products.

|Product     |                                                                                           | Indication |                                                                                | Principal
Markets
|----------- | ----------------------------------------------------------------------------------------- | ---------- | ------------------------------------------------------------------------------ | -----------------
|Tc-99m Kits |                                                                                           |            |                                                                                |                  
|            | 99mTc-MarcoAggregated Albumin Kit ("MAA")                                                 |            | Diagnosis of lung perfusion                                                    |                  
|            | 99mTc-Diethylene TriaminePentacetic Acid Kit ("DTPA") Stabilized with p-Aminobenzoic Acid |            | Diagnosis of kidney function, blood pool imaging and lung ventilation function |                  
|            | 99mTc-Calcium Glucoheptonate Kit                                                          |            | Diagnosis of kidney function                                                   |                  
|            | 99mTc-MethyleneDiphosphonic Acid Kit ("MDP") Stabilized with p-Aminobenzoic Acid          |            | Diagnosis of inflammatory and neoplastic bone disease                          |                  
|            | 99mTc-Calcium Gluceptate Kit                                                              |            | Diagnosis of kidney function and red blood cell imaging agent                  |                  
|Other       |                                                                                           |            |                                                                                |                  
|            | Stannous Gluconate                                                                        |            | Antibody labeling                                                              |                  
|            | Sodium Carbonate/Bicarbonate Solution                                                     |            | Antibody labeling                                                              |                  
|            | Acetic Acid/HCI Solution                                                                  |            | Antibody labeling                                                              |                  
|            | Sterile Empty Vial                                                                        |            | Antibody labeling                                                              |                  
|            | A-C-D Solution Special Formula                                                            |            | Use with 51Cr-Sodium Chromate                                                  |                  
|            | Intrinsic Factor Capsule                                                                  |            | Use with 57Co-Cyanocobalamin                                                   |                  
|            | Quality Control Kit                                                                       |            | Nuclear pharmacy quality control kit                                           |                  

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DRAXIMAGE's major non-radioactive products are its MDP, DTPA and MAA Tc-99m diagnostic imaging kits. While these products
would technically be classified as generic pharmaceutical products, DRAXIMAGE's versions are proprietary and are sold under the DRAXIMAGE trademark or that of its local distributors. All three of
these products have a reputation for high quality and enjoy a high degree of acceptance with DRAXIMAGE's customers, in part due to a proprietary formulation that provides additional shelf life
following reconstitution compared to competitive products.

Prior
to 2002, DRAXIMAGE outsourced the production of its Tc-99m Kits. Following FDA approval of the Company's own lyophilization production facilities in early 2002, the
resulting increased manufacturing capacity provided the opportunity to increase sales volumes of these products in existing markets in the U.S. and Canada and to build new markets in Europe and Asia,
territories in which product approvals are either already in place or expected to be granted in the near future.

In
March 2004, DRAXIMAGE received approval from the FDA to produce and market a new formulation of MDP, called MDP-25, a kit for the preparation of Technetium
Tc-99m Medronate Injection. The new MDP-25 formulation provides an increased ability to more effectively image the extremities of the skeleton, particularly hands and feet.
DRAXIMAGE anticipates that the new MDP-25 diagnostic imaging kit will be available through DRAXIMAGE and its distribution network during the second quarter of 2004.

Products under Development

DRAXIMAGE has the following products under development:

|Product              |                      | Status |             | Indication
|-------------------- | -------------------- | ------ | ----------- | ----------
|Imaging Products     |                      |        |             |           
|                     | FIBRIMAGE®           |        | Phase III   |           
|                     | INFECTON®            |        | Phase II    |           
|                     | AMISCAN             |        | Phase II    |           
|                     | Somatoscan®          |        | Preclinical |           
|Therapeutic Products |                      |        |             |           
|                     | Somatostatin Therapy |        | Preclinical |           



DescriptionFIBRIMAGE®is a Tc-99m Kit for the imaging of active thrombus in deep-vein
thrombosis ("DVT"). In DVT, a blood clot (or thrombus) forms in a vein, normally in the lower leg, thigh or pelvic area. Patients with DVT are at risk of pulmonary embolism, which occurs when a clot
associated with DVT breaks free and travels to the lungs, obstructing blood flow. The Council on Thrombosis estimates that in North America, approximately two million people are affected by DVT each
year of which approximately 600,000 result in pulmonary embolism.

Mechanism
of ActionFIBRIMAGE®is based on linking Tc-99m to the fibrin binding domain ("FBD") of
human fibronectin, a recombinant polypeptide with high binding affinity for active fibrin dimer, the primary component of actively forming venous thrombus. FIBRIMAGE®is thus able to positively
image DVT and to distinguish acute (i.e. active) thrombus from chronic (i.e. inactive) thrombus.

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Technology
PartnerRecombinant FBD was developed by Bio-Technology General Corp. (a subsidiary of Savient Pharmaceuticals Inc. (SVNT: NASDAQ)) and is
licensed to DRAXIMAGE on an exclusive, worldwide basis.

Regulatory
StatusFIBRIMAGE®entered Phase III clinical trials in Canada in early 2000 to assess diagnostic
accuracy in symptomatic patients with either an initial or a recurrent episode of DVT. The Phase III studies are designed to address the accuracy, sensitivity, specificity and positive and negative
predictive values ofFIBRIMAGE®compared to standard diagnostic tests. The progress of Phase III trials for FIBRIMAGE®prior to 2003 had been
affected by the lack of availability of clinical trial materials and by the need to revise the chemistry
and manufacturing sections of existing filings. Results from the Phase II studies ofFIBRIMAGE®were reported at the Society of Nuclear
Medicine meeting held in St. Louis in June 2000. Based on the results of the investigators, led by Dr. Raymond Taillefer of the Centre Hospitalier du l'Université du
Montréal Hôtel Dieu Campus, observers concluded thatFIBRIMAGE®is a new and very promising
radiopharmaceutical for the detection of DVT. DRAXIMAGE expects to complete the Phase IIII trials in the first half of 2004 and to submit a new drug application to the FDA in the second half of 2004.

Competing
ModalitiesTraditional approaches to the diagnosis of DVT have included Doppler ultrasound and contrast venography.

Potential
Advantages ofFIBRIMAGE®DRAXIMAGE believes that nuclear medicine imaging with FIBRIMAGE®will offer a number of advantages over existing
imaging modalities, including:



FIBRIMAGE®is considered by DRAXIMAGE to be an attractive alternative to Doppler ultrasound in diagnosing DVT in certain
areas, such as below the knee and in the pelvis, where ultrasound is less efficacious. DRAXIMAGE believes that the only competitive radiopharmaceutical imaging product on the market at this time is
AcuTect, marketed by Berlex Laboratories, Inc. DRAXIMAGE believes thatFIBRIMAGE®will compete well against AcuTect because FIBRIMAGE®binds
to fibrin dimer, which comprises 75-80% of an actively forming blood clot, whereas AcuTect binds to platelets.



DescriptionINFECTON®, a complex of Tc-99m and the anti-bacterial agent ciprofloxacin, is
a novel agent for the specific imaging of infection.INFECTON®acts by binding directly to infecting organisms and so is highly specific for
imaging infection. It is anticipated thatINFECTON®will be used to image a number of
serious medical conditions, including fever of unknown origin, osteomyelitis (bone infection), wound infection, abdominal abscess, pneumonia, appendicitis, and tuberculosis. Many of these conditions
are difficult to diagnose even by invasive means or by surgery.

Technology
PartnerINFECTON®was discovered by Drs. Britton and Solanki at St. Bartholomew's Hospital in London,
England. In March 2001, DRAXIMAGE entered into an agreement with BTG International Limited (formerly known as the British Technology Group). The agreement gives DRAXIMAGE exclusive rights to
manufacture and sellINFECTON®in the U.S., Canada, South America and Europe. DRAXIMAGE has a sub-license from Bayer AG for this
use of their ciprofloxacin.

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Regulatory
StatusINFECTON's®proof of principle was established
in a clinical trial sponsored by the International Atomic Energy Agency involving a series of 879 patients in several countries outside North America in which INFECTON®displayed excellent results,
with a sensitivity of 88.3%, a specificity of 86.5%, and an accuracy of 87.6%. The clinical study
showed that the agent achieves up to 96% specificity in detecting bacteria in the lungs, bones and tissuesareas where other diagnostics have failed in the past.

In
January 2003, DRAXIMAGE initiated a Phase I clinical trial ofINFECTON®, conducted by Dr. Raymond Taillefer
at Hôpital Hotel-Dieu at the Centre 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 various intervals after injection of INFECTON®to visualize distribution
of the imaging agent throughout the body over time. The Phase I study was completed during the first
half of 2003.INFECTON®was found to be safe and well tolerated by the subjects at the administered dosages.

In
July 2003, DRAXIMAGE initiated two Phase II clinical studies ofINFECTON®in Canada. The first of the Phase II
studies is a single-dose, open-label, multi-center trial involving 30 diabetic patients suffering from clinically confirmed bacterial infections of the foot. The second study
will examine and compare the uptake ofINFECTON®in patients with either known soft tissue infections or chronic inflammatory conditions. A
total of 50 patients with definitive bacterial infections or confirmed chronic aseptic inflammatory conditions are being enrolled in the single-dose, open-label, multi-center
trial.

Competing
Diagnostic ModalitiesThe most specific current procedure for medical imaging of inflammation due to infection involves removing blood from the patient, isolating
white blood cells in the patient's blood, radiolabelling the white blood cells with an isotope such as indium-111 or Technetium coupled with a carrier molecule and then injecting the white
blood cells back into the patient. These white blood cells localize around the site of the infection and emit radiation which can be detected using a gamma camera. White blood cells are not highly
specific and cannot readily distinguish infection from inflammation. Palatin Technologies, Inc. is developing LeuTech®, a Technetium-labeled monoclonal antibody that binds to white
blood cells, for diagnosing equivocal appendicitis and for detection of other infections, including osteomyelitis, pulmonary infection, fever of unknown origin, inflammatory bowel disease and
post-surgical infection.

Potential
Advantages ofINFECTON®Preliminary investigations suggest the possibility that INFECTON®may be the first radiopharmaceutical capable of
distinguishing inflammation from infection.



DescriptionAMISCANis a formulation of Technetium glucarate that is being developed as a
sensitive indicator of acute myocardial infarct ("AMI" or heart attack). AMI occurs when blood supply to a portion of the heart is reduced or completely cut off due to an obstruction in one of the
coronary arteries. As a result, heart muscle is deprived of oxygen (hypoxic insult) and changes from fat metabolism to carbohydrate metabolism, thus causing uptake of Technetium glucarate. Definitive
diagnosis of AMI early in the process is often difficult for clinicians. An imaging agent that will localize quickly and specifically in areas of acute necrosis could provide critical diagnostic
information. The American Heart Association, in itsHeart Disease and Stroke Statistics2003 Update, noted that in the U.S. in 2000 there
were 6,865,000 outpatient department visits and 4,397,000 visits to emergency departments with a primary diagnosis of cardiovascular disease. The prevalence (an estimate of how many people have a
disease at a given point) of AMI is 7,600,000, and it is estimated that 20 - 25% of suspected AMI cases are equivocal or difficult to diagnose. Harrison's Principles of Internal Medicine

26

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(13th
ed.) notes that 15-20% of patients present to the emergency department with symptoms other than chest pain. Some 6-21% of patients with acute infarct have
normal electrocardiograms.

Mechanism
of ActionIt has been shown in animal models and independent human trials in Europe thatAMISCANis
selectively taken up in hypoxic heart tissue. The exact mechanism of intracellular accumulation of the Technetium glucarate and the exact structure of the resulting radiolabelled compound are not
known. Subcellular distribution studies in experimental AMI have shown about 75% incorporation of Technetium glucarate in nuclear fractions, the remainder in cytosol and mitochondrial fractions, and
about 83% of nuclear-incorporated material is associated with nucleoproteins (histones). The hypothesis has been made that intracellular accumulation is simply associated with disruption of the cell
and nuclear membranes (an event occurring soon after irreversible
hypoxic insult). This product is, therefore, configured as an infarct-avid radiolabelled agent to permit detection and localization of AMI within a few hours of onset with minimal delay
between injection and imaging.

In
1999, the American Hospital Association (JAMA, Vol. 282, No. 23, 1999) reported that nuclear imaging could help physicians
determine whether patients with suspected acute cardiac ischemia have normal cardiac blood flow and may safely be sent home rather than admitted to the hospital.

Technology
PartnerDRAXIMAGE is developingAMISCANin conjunction with MTTI pursuant to a strategic alliance
established in June 1998. Under the terms of that alliance it was contemplated that DRAXIMAGE and MTTI would co-market AMISCANin the U.S.

Regulatory
StatusDRAXIMAGE filed an Investigational New Drug Application forAMISCANwith both the FDA and the
HPFB in May 2000. The Phase I study was conducted by Dr. Raymond Taillefer of the Centre Hospitalier du l'Université du Montréal Hôtel Dieu.
In February 2001, DRAXIMAGE received permission from the FDA and the HPFB to initiate a Phase II clinical study forAMISCAN. The
timely conduct of the Phase II trials has been hampered by the lack of availability of clinical trial materials during 2001 and 2002 and slow patient enrollment in 2003. The Phase II study is
currently being pursued at leading nuclear medicine centers in Canada and the United States.

Competing
Diagnostic ModalitiesThe Company is unaware of any currently approved products that would compete directly with AMISCAN'smechanism of action.
Current heart perfusion agents such as Cardiolite from
Bristol-Myers Squibb Company and Myoview from Amersham plc have the ability to distinguish normally perfused tissue from hypoxic tissue but the images are not specifically related to hypoxia, are
limited to imaging the absence of perfusion and may require multiple scans.

Potential
Advantages ofAMISCANAMISCANis expected
to offer distinct advantages in diagnosis of AMI. However, more extensive clinical trials are required to confirm the preliminary results obtained with AMISCAN.

Somatoscan®/Somatostatin Therapy

DescriptionSomatoscan®and Somatostatin Therapy are radiolabelled somatostatin peptides derived from a synthetic
peptide based on MK-678, originally developed by Merck, which shows a high binding affinity for the somatostatin receptors expressed in neuroendocrine tumors, lymphoma and carcinoid and
small-cell lung cancer. This peptide is being developed as both a diagnostic imaging agent (Somatoscan®) and
therapeutic product (Somatostatin Therapy) and will permit the identification and treatment of primary tumors and the correct diagnosis of metastatic lesions.

Technology
PartnerSomatoscan®and Somatostatin Therapy are based on innovative research by DRAXIMAGE and the
University of Pennsylvania, for which DRAXIMAGE has an exclusive world-wide license for development and commercialization.

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Regulatory
StatusPreclinical evaluation of Somatoscan®is in progress toward the filing of an application to
initiate clinical testing. A pilot study involving over 30 patients using an Iodine-131-MK-678 demonstrated good uptake in all of the target tumor types.
DRAXIMAGE's clinical studies will be designed to confirm Somatoscan's®earlier successful results observed with the Iodine-131
formulation. Additional preclinical studies to scale up synthesis of the drug substance and establish a viable formulation of Somatostatin Therapy are currently being conducted at DRAXIMAGE.

Competing
ProductsThere are two approved somatostatin-based imaging products in the marketplace: OctreoScan® from Tyco International Ltd. and NeoTect from
Berlex Laboratories Inc. Both of these molecules offer similar information but OctreoScan® is based on indium-111 and is more expensive than Tc-99m-based
NeoTect® and must be delivered in radioactive form. The Company is also aware that development work is also being done on other somatostatin-based cancer therapy products that would
compete with Somatostatin Therapy.

Potential
Advantages of Somatoscan®DRAXIMAGE believes that by enabling the same molecule to be used for both
diagnosis and therapy, physicians will have a greater ability to deliver therapeutic quantities of radiation specifically to well-defined targets in the body.



DRAXIMAGE has conducted preclinical development of atrial natriuretic peptide ("ANP"). ANP is a natural peptide produced in the atrium of the heart and is
intended for development as an imaging agent for kidney structure and function. Radiolabelled ANP has demonstrated high binding affinity to receptors in both the lung and kidney. Experimental results
in animals have shown that ANP is effective in the detection of kidney dysfunction associated with such diseases as diabetes, essential
hypertension and reno-vascular hypertension induced by the stenosis of renal arteries. ANP is based on innovative research by DRAXIMAGE, the Clinical Research Institute of
Montréal and the Research Institute of Hôtel Dieu de Montréal, from which DRAXIMAGE has an exclusive worldwide license.



DescriptionPaclitaxel is a novel, anti-tumor agent referred to in some scientific and medical literature as "taxol." Paclitaxel is
currently marketed under the brand name Taxol by Bristol-Myers Squibb Co. In January 1997, DRAXIS acquired from Mylan the exclusive Canadian marketing rights to the Mylan formulation of
paclitaxel. In June 1998, DRAXIS filed with the HPFB a New Drug Submission in Canada for paclitaxel, and the HPFB has completed its review process. Prior to approval, DRAXIS must comply with
Canadian Patented Drugs Regulations with respect to generic competition. Mylan is currently assessing the status of patent infringement litigation in Canada regarding paclitaxel, and the Company has
agreed to defer launch in Canada until such issues have been clarified.

DRAXIS
and Mylan will share the profits from marketing and selling paclitaxel in Canada according to a formula agreed to between the parties. Mylan has obtained from Phytogen Life
Sciences Inc. of Vancouver, British Columbia, the exclusive right to manufacture, market and distribute a formulated dosage form of paclitaxel in Canada, the United States and Mexico, using
Phytogen-produced bulk fine chemical paclitaxel.

Manufacturing



DRAXIMAGE manufactures its radioactive products in a cGMP compliant manufacturing facility supported by a full quality control department licensed by regulatory
agencies in Canada and the U.S.

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

Most
of the radioisotopes used to produce radiopharmaceuticals are supplied to DRAXIMAGE under a long-term supply agreement primarily, but not exclusively, with MDS Nordion,
a subsidiary of MDS Inc. and the world's largest supplier of chemical-grade isotopes for use as medical radioisotopes.

A
key distinguishing characteristic of the radiopharmaceuticals business is the need for a sophisticated logistics system. Radiopharmaceuticals, by their nature, decay continually over
time, thereby losing their potency. Therefore, manufacturing and product delivery systems must be well coordinated to ensure that the level of radioactivity present in the product supplied to the
physician is correct at the time of administration.



DRAXIMAGE's Tc-99m Kits are currently manufactured in the DPI lyophilization facility, which was accepted by the FDA in October 2001.
Subsequent manufacturing site transfer approvals for the Tc-99m Kits were received during the period December 2001 to March 2002.

DPI's
initial lyophilizer has the production capacity to approximately double the supply of Tc-99m Kits to DRAXIMAGE as compared to the previous outsourced manufacturer. A
second lyophilizer was delivered to DPI in mid-2003, and its installation and validation will allow for commercial production in the second half of 2004.



In May 2000, DRAXIMAGE received Canadian regulatory approval to market its Iodine-125 BrachySeed® for treating prostate cancer,
and in August 2000, it received FDA approval to market the implant in the U.S.

In
September and October 2000, DRAXIMAGE was approved by respectively the U.S. Nuclear Regulatory Commission and the Canadian Nuclear Safety Commission with respect to its BrachySeed® implant.

During
the period June to July 2001, DRAXIMAGE received FDA and Health Canada regulatory approval for its Palladium-103 BrachySeed®.

In
the period December 2001 through March 2002, DRAXIMAGE was approved by the FDA to transfer production of its line of lyophilized medical imaging products
in-house to the DPI lyophilization production facility.

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

In
December 2003, DRAXIMAGE obtained certification under ISO 9001: 1994, including ISO 13485: 1996, an international standard for medical device manufacturers.

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

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Sales and Marketing

At the present time, DRAXIMAGE's products are marketed primarily in the U.S. and Canada. As many of the products marketed by DRAXIMAGE have the potential for
global approvals, it is expected that non-North American based revenues will gain greater prominence in the future. The most active growth areas are expected to be Europe and South
America. In January 2003, DRAXIMAGE entered into a marketing and distribution agreement with Netherlands-based IDB Benelux Inc. for the Benelux countries.



DRAXIMAGE sells Tc-99m Kits in the U.S. to several customers and distributors including Cardinal Health, Inc., which operates the largest chain
of radiopharmacies (170 U.S. outlets servicing approximately 50% of the market), Tyco Healthcare division of Tyco International Ltd., Amersham Health business of Amersham plc, CIS bio
international (a subsidiary of Schering AG) and United Pharmacy Partners Inc.

Tc-99m
Kits sold in the U.S. are marketed under the DRAXIMAGE trademark with the exception of selected Tc-99m Kits sold through Amersham Health and CIS bio
international, which carry the distributor's trade name.

From
December 2000 until January 2003,BrachySeed® was distributed in the U.S. on an exclusive basis by Cytogen.
In January 2003, DRAXIMAGE notified Cytogen that it was exercising its rights, under its license and supply agreements with Cytogen, to terminate Cytogen's exclusivity with regard to the
marketing and distribution ofBrachySeed® implants in the United States as a result of Cytogen's continued failure to meet the minimum
annual sales requirements set out in the agreements. Cytogen subsequently unilaterally terminated each of the license and distribution and supply agreements with DRAXIMAGE.

In
April 2003, DRAXIMAGE and Cytogen reached agreement to end the license and distribution and supply agreements and to co-ordinate efforts for an orderly transition
of the U.S. brachytherapy business.



In Canada, DRAXIMAGE currently markets most of its products directly to end-users through a co-operative agreement with Bristol-Myers,
pursuant to which the two companies' sales forces promote the two companies' non-competitive product lines. This arrangement allows for enhanced coverage of the Canadian market while
reducing administrative and shipping costs. In July 2003, DRAXIMAGE renewed and expanded its distribution agreement with Bristol Myers in Canada for another five years.

DRAXIMAGE
marketsBrachySeed® in Canada directly to hospitals and healthcare buying groups through its own sales force and
marketing resources.

For
many years, DRAXIMAGE has been the primary Canadian supplier of Iodine-131 and Iodine-125 labeled radiopharmaceuticals, including solutions and capsules used
primarily for the diagnosis and treatment of thyroid gland disorders and the diagnosis of kidney and lung dysfunction.



The radiopharmaceutical market in Europe is characterized by strong regional fragmentation, which gives the leading market share to the individual manufacturer
located in each of the major countries (i.e. Amersham Health in the UK, Tyco Healthcare in Holland and CIS bio in France). DRAXIMAGE's marketing activities in Europe are at their earliest stages
pending regulatory approvals in this jurisdiction. Several products are moving through the European regulatory approval process in

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advance
of increased marketing initiatives, expected to begin in 2004. One distribution agreement for the Benelux countries, with the Netherlands-based IDB Benelux Inc., has been concluded, and
others are being sought.

Research and Development

DRAXIMAGE conducts both basic research on its own products and development work on in-licensed products and technology developed by other firms,
predominantly in the biotechnology field. DRAXIMAGE applies its chelating expertise and technologies to link these compounds with radioisotopes to create innovative diagnostic and therapeutic
radiopharmaceuticals.

In
October 2003, DRAXIMAGE received a U.S. patent for a new family of chelating compounds that have significant potential for the development of imaging and radiotherapeutic
agents to diagnose and treat diseases, including cancerous tumors or metastases. The new family of chelating compounds will permit the discovery of diagnostic imaging agents to visualize important
biological receptors or receptor-positive tumors when combined with gamma-emitting radioisotopes. The compounds are also potentially useful as therapeutic radiopharmaceuticals for the
in-vivo treatment of tumors and metastases.

DRAXIMAGE
also provides labeling technology for other companies for use with monoclonal antibodies and peptides. The Company is also working on the development of novel therapeutic uses
of radioactivity.

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

Employees

As at December 31, 2003, DRAXIMAGE had 81 employees, broken down as follows: general management and administration 7; marketing, selling and customer
service 13; quality operations 15; manufacturing 30; and research and development 16.

Patents

Most of DRAXIMAGE's products are covered by patents held by DRAXIMAGE or licensed from third parties. DRAXIMAGE has numerous patents issued and allowed and patent
applications pending in the United States, Canada, Europe and other selected locations. For example, DRAXIMAGE has
various U.S. issued patents related to chelates for radiopharmaceutical applications and process patents for the preparation of certain radiopharmaceuticals. In addition, DRAXIMAGE has licensed from
licensors certain U.S. patents covering its pipeline products and products already in the U.S. market, such asBrachySeed®.

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

Contract Manufacturing (DRAXIS Pharma Inc.)

DPI is a contract pharmaceutical manufacturer with capabilities in a broad range of dosage forms, specializing in liquid and lyophilized (freeze-dried)
injectables and other sterile products. Operating out of a cGMP-compliant 247,000-square-foot facility located in Montreal, Canada, DPI manufactures

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pharmaceutical
products for DRAXIMAGE, as well as for over 20 other pharmaceutical clients in many international jurisdictions.

Key
business development transactions involving DPI have included:



In
April 2002, the Company announced a three-year, $12 million capital plan at DPI, including a tripling of the Company's existing lyophilization capacity. The
capital plan also includes new sterile manufacturing capabilities to support recently announced contracts, improvements to production line efficiency, improvements to infrastructure, new raw material
handling facilities and supporting systems to maintain the DPI facility at the forefront of regulatory compliance. DPI's three-year, $12 million capital plan was initially financed
through loans and equity investment from DPI's shareholders, loans from Investissement Québec and internally generated funds. The equity was repurchased and the loans were repaid in
April 2004 from the proceeds of the Company's public offering.

Since
DRAXIS acquired DPI, DPI's revenues have risen from $6.1 million for the eight-month period ended December 31, 1998 to $27.0 million for the year ended
December 31, 2003.

DPI's
business goal is to become a leading supplier of high-value-added, high-margin contract manufacturing services. Key components of DPI's strategy to achieve
this goal include:



Overview of Pharmaceutical Contract Manufacturing

The value of the manufacturing portion of the $400 billion global pharmaceutical market was estimated by CIBC World Markets in 2001 to be
$50 billion, with approximately $13 billion outsourced.

The
secondary, or dosage-form, manufacturing segment that is currently outsourced was further estimated to be approximately $5.5 billion with an anticipated
near-term growth in the 10%25% range.

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The
reasons pharmaceutical companies outsource manufacturing include:



The
Company believes that there is currently a significant global shortage of sterile lyophilization capacity and that this sector offers significantly higher margin growth potential for
DPI due to its technical complexity and its increasing demand as a favored dosage form for biotechnology products in particular.

DPI
believes that the key competitive factors in the contract manufacturing industry include the reliability of supply, quality of product, strict compliance with governmental
regulations, capacity availability, competitive pricing and the technical and manufacturing ability to produce a full range of quantitiesfrom small pilot batches often required for
clinical trials to larger commercial quantities.

Competition

DPI competes with pharmaceutical companies that have in-house manufacturing capabilities as well as with third-party contract manufacturers, including
Abbott Laboratories, Boehringer Ingelheim, Cardinal Health, Inc., DPT Laboratories, Haupt Pharma AG, Patheon Inc. and DSM Pharmaceuticals, Inc.

Manufacturing Capabilities

DPI is a customer-driven pharmaceutical contract manufacturing company that is positioned to manufacture a variety of dosage forms. DPI is one of a few existing
full-scale
pharmaceutical contract manufacturing facilities in Canada that has FDA-approved sterile manufacturing and sterile lyophilization capabilities.

Plant
operations are organized into four manufacturing areas, supported by packaging and warehousing and distribution functions.



Lyophilization is the preferred dosage form for a broad range of sterile products that are unstable in liquid form. Lyophilization is a complex process of
freeze-drying in which a liquid solution is frozen under vacuum and all water is removed, leaving behind a stable, dry, sterile powder that has a relatively long shelf life and is easily reconstituted
into a liquid form prior to use. Products delivered in a lyophilized dosage form include injectable pharmaceuticals, vaccines, biotechnology proteins or peptides and diagnostic products.

DPI's
existing sterile manufacturing capabilities were enhanced by the addition of sterile lyophilization, which became fully operational 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 and unloaders, the freeze-drier unit and a capper. This first
freeze-drier has a capacity based on 11 square meters (120 square feet) of shelf space, while the planned second unit, at 24 square meters of shelf space capacity, will essentially triple overall
capacity once it is operational.

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In
2002, the Company announced a three-year, $12 million capital plan for DPI, including the tripling of DPI's existing lyophilization capacity, new sterile
manufacturing capabilities to support recently announced contracts, improvements to production line efficiency, improvements to infrastructure, new raw material handling facilities and supporting
systems to maintain DPI at the forefront of regulatory compliance.

The
second lyophilizer, with 24 square meters (254 square feet) of freeze-drying shelf space, will be incorporated into DPI's existing lyophilization facility. The specialized facility
was originally designed to readily accommodate this second lyophilizer at a cost significantly less than that of the initial installation with minimal disruption to ongoing production. The two units,
both of which are supplied by BOC Edwards, will provide total annual capacity equivalent to five to six million 10 mL-vials of lyophilized product.

The
second lyophilizer was designed and built over a 15-month period and delivered in August 2003. Installation and validation progressed through 2003 and will
continue to progress into 2004. The lyophilizer, together with two additional autoclaves, is expected to begin commercial production in the second half of 2004, although revenue generation will not be
significant until 2005.



The Sterile Products Department ("SPD") includes preparation and pharmaceutical areas with manufacturing, filling and inspection rooms for the production of
injectable liquids in ampoules and vials, topicals and sterile ophthalmic ointments. DRAXIS believes that DPI possesses one of the most modern facilities of its kind in Canada approved for the
manufacture of sterile prescription pharmaceuticals for Canada, the United States and other global markets.

Including
the new lyophilization line, SPD covers approximately 17,100 square feet and is designed for segregated operations complemented by secure access controls.

Computerized
systems are utilized for both topical and automated ointment lines in order to optimize process control. Both of these lines are closed-loop systems to ensure
sterile integrity. The sterile ointment system utilizes a patented automated system to place tubes on the fillers, thereby minimizing human intervention.

The
processes that are 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 manufactured include solutions in ampoules and vials, suspensions and solutions in drop dose form and ointments in tubes. The department currently has the capacity to fill vials
ranging in size from 5 ml to 30 ml, ampoules ranging in size from 1 ml to 10 ml, and 3.5 g tubes.



The 16,000-square-foot Ointments, Creams and Liquids ("OCL") Department offers substantial flexibility in production scale.
Production of ointments and creams utilizes a gravity-fed system and incorporates segregated wash areas and clean storage areas for equipment.

Batch
capability in the OCL Department varies from 200 to 18,000 liters and incorporates four dedicated packaging lines. Interconnecting tanks can be utilized where required, thereby
providing production flexibility. Fully automatic validated CIP systems ensure the purity of each customer's product. Product is pumped to two of the packaging lines and gravity fed to the other two
lines. Dosage forms/product types manufactured include creams, ointments, lotions, syrups, shampoos, gels and suspensions.

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

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

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



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

Within
the department there are packaging lines for ointments and creams, lines for tablets (bottles and blisters) and a sterile product automatic inspection and packaging line. One
packaging area is
dedicated to small-quantity tablet filling. The inspection of finished sterile products in glass ampoules includes automated inspection by a leak pinhole detector. An automatic inspection machine has
been validated to detect particles in sterile products packaged in vials and ampoules. These products may also be inspected manually.

Several
packaging types can be accommodated, including jars, bottles (glass and plastic), blisters, vials and ampoules. The department handles a wide variety of product types, including
caplets, tablets, creams, ointments and liquids.

Regulatory

Manufacturing operations at DPI, from receipt of raw material and 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 appropriate international regulatory standards. Regular inspections of
facilities, production processes, and control and validation systems, as well as employee training programs, are conducted by the Company, by U.S., Canadian and international governmental regulatory
agencies and by customer inspection teams throughout the year. The Company maintains a distinct internal team to provide effective liaison with various external inspection groups.

DPI
achieved a consistent record of regulatory approvals during 2002 and 2003 as tangible evidence of its commitment to regulatory compliance and quality operations.



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All
regulatory, quality control and quality assurance activities at DPI are under the direction of a director of quality who reports directly to the president of DPI.

Warehousing and Distribution

The warehousing and distribution facilities of the DPI plant allow additional manufacturing flexibility and efficiency. A five-tier pallet-racking
warehouse has a full height of 29 feet, covers approximately 48,900 square feet of space and has six shipping and receiving docks. The warehouse has separately locked areas, including refrigeration
units to control sensitive raw materials and finished goods.

In
November 2002, DPI commissioned its new raw material storage and dispensing area, which improved cGMP compliance and provided an improved environment for the handling and
accurate dispensing of raw materials. This installation improves the flow of material and personnel and is equipped with a new ventilation system and
state-of-the-art dust containment technology. This project, which is part of DPI's three-year capital plan, was completed both on time and within
original cost estimates.

Customers



DPI manufactures prescription and non-prescription pharmaceutical products for more than 20 pharmaceutical companies (excluding the Company) pursuant
to manufacturing supply contracts. Currently, DPI's three major customers are Warner-Lambert Consumer Healthcare, Division of Pfizer Canada Inc., Bone Care and GSK.

In
March 2000, DPI entered into a five-year manufacturing and supply agreement with Warner-Lambert Consumer Healthcare, Division of Pfizer Canada Inc. covering
several non-prescription products for the Canadian market, including Polysporin®, Sudafed®, Actifed® and Zincofax®. Manufacturing of these
products commenced in early 2000.

In
December 2001, DPI finalized supply and related agreements with GSK for the renewal and expansion of an existing contract manufacturing relationship between the companies. The
products being transferred to DPI are all established, sterile products currently marketed by GSK in multiple international markets. In 2002, an additional, established sterile injectable product was
added under this contract and commercial production of this product commenced in the second quarter of 2002. During 2002, site transfer and related activities associated with the other GSK products
continued and production started in the second quarter of 2003 and ramped up through 2003 and 2004 with full production expected by the end of 2004.

In
the second quarter of 2002, DPI was designated by Axcan Pharma Inc. as a commercial manufacturing site for its lyophilized biological product, Photofrin®
photodynamic therapy, used to selectively palliate, cure or prevent various forms of tumorous cancers.

In
2002, DPI was named by Bone Care as an additional manufacturing site forHectorol® Injection, and commercial shipments of
the sterile injectable product commenced in March 2003. Production ofHectorol® Injection increased substantially throughout 2003.

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Commencing in early 2002, DPI became the FDA-approved manufacturing site for DRAXIMAGE's lyophilized Tc-99m Kits. In addition, DPI has
been qualified as the manufacturing site forAnipryl®tablets.

Employees

As at December 31, 2003, DPI had 284 employees, consisting of: 40 managerial employees, 36 clerical employees, 48 quality operations employees and 160
unionized hourly employees. The unionized hourly employees are represented by the United Food and Commercial Workers International Union, Local 291P. A new five-year collective agreement
between DPI and the union concluded in February 2004, running from May 1, 2003 to April 30, 2008. DPI has no significant unresolved issues with the union.

Former Equity Partners

From February 2000 to April 2004, SGF and senior management of DPI held a non-controlling equity interest in DPI. In 2002 and 2003, DPI
repurchased and cancelled shares held by a former DPI employee and members of DPI's management team in exchange for cash and settlement of existing loans. In April 2004, the Company acquired
from SGF its 32.7% interest in DPI and also repaid $3.1 million (CDN$4.2 million) in debt owed by DPI to SGF.

Other Collaboration Agreements

The Company has continuing financial interests associated with its collaboration agreements with Pfizer with respect to Anipryl®, with
GlaxoSmithKline Consumer Healthcare with respect to the SpectroPharm® line of products and with Shire with regard
to Canadian sales of products divested in 2003.



Beginning in 1990, the Company expanded on its knowledge and experience with selegiline by initiating directly on its own behalf, as well as through contract
research arrangements, studies designed to investigate the potential of selegiline for companion animal use. This initiative ultimately resulted in the formation of its subsidiary DAHI, through which
the Company developed and commercialized a companion animal health product,Anipryl®.

Anipryl®is a selegiline product developed for use in veterinary prescriptive applications, particularly in dogs. The two
indications for whichAnipryl®is currently approved are canine Cushing's disease and canine cognitive dysfunction syndrome ("CDS").

Cushing's
syndrome refers to increased blood cortisol and the presence of one or more typical clinical signs, such as change in appetite, obesity, frequent urination, abdominal
distension, loss of hair, lethargy and other behavioral changes. Canine Cushing's disease is the form of the disorder that is due to primary hyperfunction of the pituitary gland. Approximately 15,000
cases of canine Cushing's disease are diagnosed each year in Canada and 150,000 in the United States.

CDS,
sometimes known as "Old Dog Syndrome," refers to the onset in elderly dogs of behavioral problems unrelated to a generalized medical condition such as neoplasia, infection, or organ
failure. Typical signs of this disorder can include confusion, disorientation, decreased activity, changes in sleep/wake cycles, loss of house training and loss of interest in or ability to interact
with its owner and environment. Approximately 150,000 older dogs in Canada and 1.5 million older dogs in the United States are diagnosed with CDS each year.

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From
March 1991 to November 1996, DAHI's common shares were publicly traded on NASDAQ. In November 1996, the Company took DAHI private in a mandatory share exchange
transaction.

In
December 1997, the Company entered into an alliance with Pfizer whereby Pfizer was granted a perpetual exclusive license to market, sell and distribute Anipryl® in exchange for non-refundable
fees, royalties based on the worldwide sales of Anipryl®, a manufacturing and supply agreement and a research collaboration.

In
December 1999, the Company and Pfizer amended the terms of the alliance (the "First Amendment") whereby $9.0 million of potential additional non-refundable
fees were eliminated in exchange for the Company receiving additional regulatory support for a potential new indication and additional manufacturing data. These potential additional
non-refundable fees would have become payable if Pfizer had exercised its rights to acquire product registrations following regulatory approval of Anipryl® in designated European countries.

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

In
December 2001, the Company and Pfizer further amended the term of the alliance (the "Second Amendment") whereby the Company received a payment of $3.1 million with
respect to minimum royalty entitlements for the second and third three-year periods ended December 31, 2001 and 2002 and modifications to future royalty entitlements. The Second
Amendment also resulted in all rights toAnipryl® outside of North America reverting back to the Company, forfeiture of any additional
minimum royalty entitlements and the termination of any future collaborative research on new indications or formulations forAnipryl®.

Up
to December 31, 2003, the Company received a total of $28.1 million in non-refundable fees and $13.9 million in royalties and royalty-related
payments.

Under
the amended arrangement, the Company will not be entitled to receive any additional non-refundable fees but will continue to earn royalties on Pfizer's sales of Anipryl® in the United States and
Canada. The $28.1 million of non-refundable fees already received from Pfizer have been
deferred and are being recognized 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.

The
Company currently does not intend to pursue any additional or expanded indications forAnipryl®.

Anipryl® is currently approved for sale in the following jurisdictions:

Canadathe
Canadian Bureau of Veterinary Affairs ("BVA") approvedAnipryl® for the control of clinical signs
associated with canine Cushing's disease and CDS in October 1995 and February 1997, respectively;

United
Statesthe FDA granted regulatory approval to market and sellAnipryl® in the United States for the
treatment of canine Cushing's disease and CDS in June 1997 and September 1997, respectively;

Australiain
December 1998, the National Registration Authority granted regulatory approval to market and sell Anipryl® in Australia for the control of clinical signs associated with canine Cushing's
disease and CDS;

New
ZealandIn May 2000, the New Zealand Animal Remedies Board granted regulatory approval to market and sell Anipryl® in New Zealand for the control of clinical signs associated with canine
Cushing's disease and CDS; and

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Brazilin
October 2000, the Brazilian Ministerio da Agricultura e de Abastecimento granted regulatory approval to market and sell Anipryl® in Brazil for the control of clinical signs associated with
canine Cushing's disease and CDS.

In
1997, DAHI filed in Europe for regulatory approval ofAnipryl® by the decentralized procedure. This procedure allows DAHI
to file theAnipryl® submission in a country of its choice, and to designate five additional member states of the European Union as the
countries that will review and approve the regulatory submissions. DAHI chose the United Kingdom as the country in which to file the initial Anipryl® applications. In July 2003, DAHI received
authorization from the VMD to market Anipryl® Tablets for Dogs in the United Kingdom. The UK submission is currently being reformatted in order to be suitable for submission to
other European Union member states. The VMD will act as DAHI's advocate in this procedure.

DRAXIS
may continue to seek veterinary regulatory approvals forAnipryl® in other jurisdictions, as appropriate.

Sales and Marketing

Under the terms of the amended arrangement, Pfizer will continue to market and sellAnipryl® in the
United States and Canada.

In
July 2003 DRAXIS granted Ceva Santé Animale S.A. an exclusive license for Europe for the marketing and distribution of Anipryl®.

DRAXIS
continues to seekAnipryl® marketing partnerships for additional countries outside North America.

Manufacturing

DAHI's primary supplier of selegiline for the production ofAnipryl® is Chinoin, and DAHI purchases
its supply of selegiline under a supply agreement with Chinoin dated October 1, 1990, as amended (the "Chinoin Supply Agreement"). In 1995, DAHI developed the 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 a third-party supplier or to manufactureAnipryl® itself
in a qualified facility.

Until
recently,Anipryl® was produced by a third-party contract manufacturer. During 2000, Pfizer qualified one of its own
facilities to manufactureAnipryl® for the North American marketplace.

The
Company intends to qualify DPI to manufactureAnipryl® upon receipt of regulatory approval to transfer the manufacturing
site to DPI. The application for the site transfer has been submitted to the FDA, and the transfer is expected to be completed during 2004.

Competition

The animal health marketplace is generally served by veterinary, agricultural or animal health divisions of large international pharmaceutical and chemical
companies that are involved in research and development activities. Products resulting from their activities may, in the future, compete directly with Anipryl®.

The
Company is not aware of any other HPFB, BVA or FDA approved product available at this time that competes directly with Anipryl®. In the United States, the 1988 generic animal drug law offers
marketing protection from veterinary generic applicants in the
United States for a period of five years. This period ended in 2002, in the case ofAnipryl®. However, that law does not prevent other
companies from repeating the full clinical New Drug Application process to seek FDA approval for a

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bio-equivalent
product, nor does it prohibit human generic versions ofAnipryl® from being sold to veterinarians. Any such
competitor, including sellers of a human or veterinary generic selegiline, would be subject to DAHI's U.S. and international patent rights.

No
significant competition forAnipryl® from products approved for veterinary or human use has been experienced to date in
Canada or the United States. However, there are two other treatments available that have not been approved in Canada or the United States to treat canine Cushing's disease, but which may be used
off-label for canine Cushing's disease: Lysodren (mitotane) by Bristol-Myers Squibb Co., which was approved for use in the treatment of human inoperable cancer of the adrenal gland, and
Nizoral (ketoconazole) by Johnson & Johnson Inc. These competitive treatments work by selectively killing the outer layer of the adrenal gland, thereby limiting production of
corticosteroid. Notwithstanding such off-label uses, the human generic version ofEldepryl® is not approved for the treatment of
canine Cushing's disease or CDS in Canada, the United States or elsewhere. The dosage required for dogs suffering from canine Cushing's disease and CDS, in most cases, is much higher than the human
5mg dose for selegiline. Veterinarians will have an incentive to prescribe the product actually approved for veterinary use that can be dispensed from their offices. Lastly, patents for the use of Anipryl® for the treatment of dogs with conditions including canine Cushing's disease and CDS have now issued in Canada, the United States
and other jurisdictions. DAHI is positioned to enforce its proprietary patent rights and defend itself against infringement by other parties.

Patents

In September 1992, the United States Patent and Trademark Office issued a patent to DAHI entitled "Use of l-deprenyl for Retention of Specific
Physiological Function." The patent claims specific uses of l-deprenyl for use in treating dogs and covers currently sold products. Similar patents have also issued to DAHI in many foreign
jurisdictions, including Australia, Canada, Hong Kong, New Zealand, Venezuela and Europe. Six additional U.S. patents have also issued to DAHI. These patents cover various veterinary pharmaceutical
uses of l-deprenyl such as treatment of Cushing's Disease, weight loss, treatment of immune system dysfunction, extension of life expectancy of dogs, and treatment of hearing loss. Many of
these six patents were also filed in foreign countries that have major companion animal markets.

The
European CDS patent was subject to an opposition procedure initiated by Ceva. Ceva holds patents in the United States, Canada and Europe relating to the use of selegiline for
treating behavioral disorders with change of mood in dogs and cats. Ceva's European patent was subject to an opposition procedure by DAHI. In July 2003, DRAXIS and Ceva agreed to discontinue
the opposition proceedings between them before the EPO. DRAXIS also granted Ceva an exclusive license for Europe for the marketing and distribution of Anipryl® or the use ofAnipryl® claims. In return, Ceva agreed to pay DAHI a
percentage royalty on European sales ofAnipryl® and/or the use ofAnipryl®
claims, in addition to nominal milestone payments upon the regulatory approval ofAnipryl® in the UK and in subsequent additional
jurisdictions within the European Community.



In May 2000, the Company entered into an arrangement with Block Drug Company (Canada) Limited, now part of GlaxoSmithKline Consumer Healthcare, with
respect to the SpectroPharm® line of non-prescription dermatology products, which included the sale of product rights by the Company in exchange for a
non-refundable fee, the acquisition of inventory on hand, a supply agreement and a technical services arrangement. The $9 million received by the Company with respect to the
SpectroPharm® product rights has been deferred and is being recognized as revenue on a straight-line basis over the period to January 31, 2005.

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Discontinued Operations (DRAXIS Pharmaceutica)

In July 2003, DRAXIS completed the divestiture of its Canadian 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 forAlertec®, Diastat®, Hectorol®,Permax® and Zanaflex®. Shire agreed to pay DRAXIS through
a combination of cash and contingent milestone payments plus royalties on future product sales. DRAXIS has received $9.6 million in cash from Shire and could receive up to an additional
$2.9 million in market-driven contingent milestones over the next several years. In addition, Shire assumed responsibility for the financial provisions of the license agreement related to Permax®. This transaction is in addition to the $6.5 million received by DRAXIS in March 2003 from affiliates of Elan
Corporation for the return of Canadian rights for several of Elan's neurology products that had not achieved regulatory approval in Canada.

Government Regulation

The Company's business is governed by a variety of industry-specific statutes and regulations in Canada, the United States and other countries.

Drug Approval Process



In Canada, pharmaceutical research, development and marketing activities are regulated by the Food and Drugs Act (Canada) and the rules and regulations made under
that Act. The Food and Drugs Act (Canada) is administered by the Therapeutic Products Directorate of the HPFB, which regulates the use and sale of diagnostic and therapeutic products in Canada.
Regulations imposed by federal and local authorities in the United States, where regulation is carried out by the FDA, also significantly regulate the Company's activities.

In
Canada, clinical trials of new pharmaceutical products involve three phases, conducted under what is known as Investigational New Drug Submissions. In Phase I, the product's safety is
assessed during
clinical trials involving healthy volunteers. In Phase II, the product's efficacy, dosage and safety are tested on a small number of patients with known disease. In Phase III, controlled clinical
trials are conducted in which the product is administered to a larger number of patients with known disease, and further information relating to safety and efficacy is gathered. Further, in Phase III,
the effectiveness of the product is, in certain cases, compared to that of accepted methods of treatment. If clinical studies establish that the product has value, an applicant files a New Drug
Submission with the Therapeutic Products Directorate of the HPFB to obtain marketing approval for the product. The New Drug Submission includes a comprehensive summary and analysis of the results of
the clinical trials, information relating to proposed labeling and packaging materials, and data relating to the proposed manufacturing and quality control procedures. If the New Drug Submission is
found to be satisfactory, the HPFB issues a Drug Identification Number and a Notice of Compliance permitting sale of the new product in Canada.

In
the United States, new drugs require FDA approval of a marketing application (i.e., a New Drug Application or a Product License Application) prior to commercial sale. To obtain
marketing approval, data from adequate and well-controlled clinical investigations, demonstrating to the FDA's satisfaction a new drug's safety and effectiveness for its intended use, are
required. Such data is generated in studies conducted under an Investigational New Drug Application. Clinical studies are characterized as Phase I, Phase II and Phase III trials. In a marketing
application, the applicant must also demonstrate the identity, potency, quality and purity of the active ingredients of the product involved and the stability of these ingredients. Further, the
manufacturing facilities, equipment, processes and quality controls for the new drug must comply with prescribed cGMP for drugs or biologic products, both in a pre-licensing inspection and
in subsequent periodic inspections after

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licensing.
Failure to demonstrate that a drug can be commercially manufactured in accordance with strict regulatory guidelines will preclude approval of the drug. Regulatory approvals must be received
before moving the production of a product to a new manufacturing site, and such approvals may cause delays in the production, supply and marketing of a product.

The
process of completing clinical trials and obtaining regulatory approvals for a new drug will, in general, take a number of years and may require the expenditure of substantial
resources. Once a New Drug Application/New Drug Submission or Product License Application is submitted, there can be no assurance that the HPFB or FDA will review and approve the application in a
timely manner. In certain limited circumstances, the HPFB will permit a New Drug Submission to be subject to a priority review. The HPFB's Priority Review Process allows for a faster review to make
available promising drug products for life-threatening or severely debilitating conditions for which there are few effective therapies available on the market. Even after initial approval
has been obtained, further studies, including post-marketing studies, may be required to provide additional data on safety necessary to gain approval for the use of the product as a
treatment for clinical indications other than those for which the product was initially tested. The HPFB and FDA may also require post-marketing surveillance programs to monitor a
product's side effects. Results of post-marketing programs may limit or expand the further marketing of products. A serious safety or effectiveness problem involving an approved new drug
may result in HPFB or FDA action requiring withdrawal of the product from the market and possible civil action.

The
Special Access Program of the Therapeutic Products Directorate of HPFB is responsible for authorizing the sale of pharmaceutical, biologic and radiopharmaceutical products that are
not yet approved in Canada to treat patients in emergencies who have a serious or life-threatening illness when conventional therapies have failed or are unsuitable.

Medical
devices such as DRAXIMAGE'sBrachySeed® do not require the detailed approval process for therapeutic drugs. If the
device is "substantially equivalent" to one currently marketed, as is the case withBrachySeed®, then the approval period can be as short as
90 days, since no clinical trials are required. In the United States this process is called a 510-K approval.

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



The drug approval process for veterinary pharmaceuticals is similar to the process for obtaining approvals for human pharmaceuticals. To receive regulatory
approval, a new animal drug must successfully complete a number of development phases. The phases include establishing safety and efficacy in target species as well as the establishment of
manufacturing procedures and final product labeling. The final phase of this process includes controlled clinical trials in which the drug is administered to a large number of animals, and further
information relating to safety and efficacy is gathered. Following the clinical trials, the drug sponsor submits an application to the appropriate regulatory agency for marketing approval.

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Drug Marketing



Prescription drug products generally are made known to healthcare professionals through advertisements and visits to such professionals, known as "detailing."
Product-specific advertising to the general public is permitted, subject to certain regulations and industry guidelines.

An
increasing percentage of sales of prescription pharmaceuticals relates to sales of products which are paid, in whole or in part, by government or private insurance drug plans. Many
governments have established regimes to control drug pricing at the retail pharmacy level. In addition, there have been, and the Company expects that there will continue to be, an increasing number of
proposals to implement government and other third-party payer restrictions on the pricing of prescription pharmaceuticals as a result of continuing efforts to contain or reduce the costs of healthcare
throughout North America. See Item 3: Key InformationRisk Factors.

In
most provinces of Canada, there is a drug benefit formulary. A formulary lists the drugs for which a provincial government will reimburse qualifying persons and the prices at which
the government will reimburse such persons. There is not complete uniformity among provinces; however, provincial governments generally will reimburse the lowest available price of the generic
versions of any drug listed on the province's formulary list. The formularies can also provide for drug substitution, even for patients who do not qualify for government reimbursement. The effect of
these provincial formulary regimes is to encourage the sale of lower-priced generic versions of pharmaceutical products.



In the case of new veterinary "prescription" pharmaceuticals, no sales may be made by drug manufacturers directly to the public. Instead, a prescription drug is
initially available only through veterinarians who generally sell it from their offices. Veterinary prescription drugs generally are promoted by manufacturers through advertisements to veterinarians
and sales visits to animal health clinics. Product-specific advertising to the general public is permitted, subject to certain regulations and industry guidelines.

There
are no government price controls or reimbursement plans in the veterinary pharmaceutical marketplace. There are a few private pet insurance plans; however, these plans do not
represent a significant portion of the veterinary market. Accordingly, the veterinary marketplace is not subject to the cost containment measures that are prevalent in the human pharmaceutical market.

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Patent Protection and Price Controls

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

Historically,
pharmaceutical companies have relied heavily upon patents to protect proprietary positions on drug products. The Company's policy is to protect its technology, inventions
and improvements by, among other things, filing patent applications for technology it considers important to the development of its business. The Company also relies upon trade secrets,
know-how and licensing opportunities to develop and maintain its competitive position.

Under
United States patent law, a patent is issued to the person who made the invention first, rather than to the first person to file an application thereafter, as is common in other
countries. Consequently, in determining who is entitled to a United States patent on a particular technology, events in a NAFTA country after December 8, 1993 may be important to consider.
Additionally, and for the same reasons, events occurring in a WTO country other than a NAFTA country, after January 1, 1996 may be important to consider.

The
Patent Act (Canada) provides remedies for patent infringement. In addition to the standard legal action for patent infringement, in 1993, the Canadian Government enacted Regulations
under the Patent Act (Canada) whereby a competitor proposing a generic version for a drug which has been marketed in Canada under a Notice of Compliance must serve a Notice of Allegation on the
originator of the drug before the competitor may be granted a Notice of Compliance in respect of its generic drug. The originator of the drug may apply to the Federal Court of Canada for an order
prohibiting the Minister of National Health and Welfare from issuing a Notice of Compliance until the issue of possible patent infringement has been resolved.

The
Canadian Government has also established the Patented Medicines Prices Review Board ("PMPRB"), which monitors and controls prices of patented drug products marketed in Canada by
persons holding, or licensed under, one or more patents relating to drug products. For a patented drug product, the PMPRB will approve an introductory price (based on a comparative analysis) and will
require that the price not be increased each year thereafter by more than the annual increase of the Canadian Consumer Price Index. As such, the existence of one or more patents relating to a drug
product, while providing some level of proprietary protection for the product, also triggers a governmental price control regime which significantly impacts on the Canadian pharmaceutical industry's
ability to set pricing.

Drug Manufacturing

Pharmaceutical companies are required to submit as part of their New Drug Submission in Canada, or as part of their New Drug Application in the United States,
detailed descriptions regarding the proposed manufacturing and packaging process and manufacturers in respect of a particular drug. As a result, a decision to manufacture or package products in a
facility other than that originally approved under the New Drug Application or New Drug Submission (as may be the case with contracting manufacturing outsourcing) can result in significant delays in
production.

Pharmaceutical
manufacturing facilities are subject to strict quality control standards including cGMP. Production processes within a facility are subject to one-time
validation testing, as well as

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periodic
review. In the case of sterile product manufacturing, including lyophilized products, the standards are even higher than for the manufacturing of ointments, creams and liquids. The
manufacture of radioactive drugs is subject not only to cGMP but also the environmental safety, handling and transportation requirements of the Canadian Nuclear Safety Commission ("CNSC") and the
United States Nuclear Regulatory Commission ("NRC"). There are no issues with respect to radioactive waste disposal since all of the isotopes used in nuclear medicine are short-lived and can be easily
stored on site until decayed and then disposed of.

The
FDA, HPFB, CNSC and NRC conduct regular audits of the Company's facilities to ensure compliance with cGMP and other statutory requirements. See Item 3: Key
InformationRisk Factors.

Organizational Structure

The following chart illustrates the corporate organization and jurisdictions of the Company and its significant affiliates as at May 14, 2004:

CHART

All
of the above-depicted companies are wholly owned subsidiaries of DRAXIS Health Inc.

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Property, Plants and Equipment

The Company's operating facility is a 247,000-square-foot pharmaceutical manufacturing facility which houses DRAXIMAGE and DPI. The
facility is owned by DPI and is located at 16751 Trans-Canada Road, Kirkland, Quebec, Canada, H9H 4J4.

The
Company believes all of the above-noted properties are suitable and adequate for its business purposes as presently contemplated.

Item 5. Operating and Financial Review and Prospects

The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's consolidated
audited financial statements and notes thereto for the year ended December 31, 2003.

All
amounts referred to herein are expressed in U.S. dollars and are in accordance with U.S. generally accepted accounting principles ("GAAP"), unless otherwise indicated. Other
noteworthy accounting issues are described under "Accounting Matters."

Overview

DRAXIS is a specialty pharmaceutical company focused on the development, production, marketing and distribution of radiopharmaceuticals and the provision of
pharmaceutical contract manufacturing services, specializing in liquid and freeze-dried injectables and other sterile products through its contract manufacturing operations.

The
Company believes that its radiopharmaceutical business, acquired in 1997, and its contract manufacturing business, acquired in 1998, have significant long-term growth
potential, and the Company has invested considerable financial and management resources toward the development of these businesses.

Accordingly,
the Company's primary operational focus consists of: (i) improving near-term financial and operational performance of its radiopharmaceutical and
manufacturing businesses through increasing sales of existing products and services, improving manufacturing efficiency and effectiveness, and obtaining additional regulatory approvals; and
(ii) securing and advancing its base for long-term growth through the development of its existing product pipeline as well as identifying new business opportunities that are
consistent with the Company's capabilities and that contribute to the long-term value of the Company.

Consistent
with this strategic focus, the Company divested its dermatology product lines in 2001 and in 2003 completed the sale of its Canadian prescription pharmaceutical sales and
marketing business, DRAXIS Pharmaceutica. The Company also realigned its senior management responsibilities in 2003 to focus on its core businesses. The positive progress made by both the
radiopharmaceutical and contract manufacturing businesses is highlighted by the improved operating results of these core businesses and improved cash flow of the Company in 2003.

Specifically,
in 2003, the Company achieved a number of significant accomplishments including:



46

---





Subsequent
to December 31, 2003 the Company announced:



The
Company indicated at the beginning of 2003 that its target was to achieve radiopharmaceutical revenues by the end of 2007 of $30 million to $35 million, representing
more than 3 times its 2002 revenue base. The radiopharmaceutical segment's revenue growth in 2003 is in-line with these targets.

The
Company also indicated at the beginning of 2003 that its target was to achieve revenue from its manufacturing segment by the end of 2007 of between $40 million to
$50 million, representing more than two times its 2002 revenue base coupled with improving profitability margins. The manufacturing segment achieved a 28.8% revenue growth in 2003 over 2002.
The EBITDA margin for the manufacturing segment has improved from 3.0% for 2002 to 4.0% for 2003 with an average margin over 7.8% over the last three quarters of 2003.

The
Company also expected to be able to generate positive operating cash flow for 2003, before changes in working capital, which it has achieved.

47

---



Consolidated Results of Operations(1)

Years Ended December 31,2003

2002

2001(in thousands of U.S. dollars except share related data)
(U.S. GAAP)RevenuesProduct sales

$
40,535

$
30,338

$
27,151Royalty and licensing


8,658
(2)

8,302


6,752$
49,193

$
38,640

$
33,903Product gross margin

$
12,813
(3)
$
6,934

$
5,106% of Product sales revenues


31.6
%

22.9
%

18.8
%Royalty and licensing revenue


8,658


8,302


6,752SG&A


(9,904
)

(7,542
)

(6,369
)% of Product sales revenues


-24.4
%

-24.9
%

-23.5
%EBITDA(4) (pre-R&D)


11,567


7,694


5,489% of Total revenues


23.5
%

19.9
%

16.2
%R & D


(1,594
)

(1,996
)

(1,280
)EBITDA(4)


9,973


5,698


4,209% of Total revenues


20.3
%

14.7
%

12.4
%Depreciation and amortization


(3,287
)

(2,804
)

(2,436
)FinancialForeign exchange translation


(701
)

(12
)

378Other


(831
)

(268
)

(403
)Income tax (provision) recovery


(874
)

154


(3,049
)Minority interest


391


252


286Income (loss) from discontinued operations


8,531


(834
)

(569
)Net income (loss)

$
13,202

$
2,186

$
(1,584
)Net income (loss)From continuing operations

$
4,671

$
3,020

$
(1,015
)From discontinued operations


8,531


(834
)

(569
)$
13,202

$
2,186

$
(1,584
)Basic income (loss) per shareFrom continuing operations

$
0.126

$
0.081

$
(0.028
)From discontinued operations


0.230


(0.023
)

(0.016
)$
0.356

$
0.058

$
(0.044
)


---

47

---



Comparison of Years Ended December 31, 2003 and 2002

Consolidated revenues from continuing operations for the year ended December 31, 2003 increased 27.3% compared to 2002 due to higher product sales coupled
with the recognition of $1,436,000 of deferred revenue related to the termination of the agreement with the Company's formerBrachySeed®
licensee in the U.S. (see Accounting MattersTermination of BrachySeed® Agreements) in the first quarter of 2003, partially
offset by lowerAnipryl®-related deferred revenue.

Increased
product gross margins associated with continuing operations for 2003 are attributable to changes in product mix driven by higher margin new business in both the
radiopharmaceutical and contract manufacturing businesses coupled with the recognition of $730,000 in insurance proceeds as a reduction of cost of goods sold (see Accounting
MattersInsurance Proceeds).

Selling,
general and administration expenses associated with continuing operations, expressed as a percentage of product sales, for the year ended December 31, 2003 decreased
modestly compared to 2002 as the impact of increased product sales was more than offset by the costs associated with commencement of direct sales of BrachySeed® in the U.S and costs associated with
developing new business.

Research
and development expenditures associated with continuing operations for 2003 decreased compared with 2002 due to higher than normal spending in the third quarter of 2002 for
third-party toxicity testing ofFIBRIMAGE® andAMISCAN.

EBITDA
from continuing operations for the year ended December 31, 2003 increased 75.0% compared to 2002 due to increased product sales, changes in product mix driven by new
business, the recognition of $1,436,000 of previously deferredBrachySeed® revenue, and the receipt of $730,000 of insurance proceeds,
partially offset by lowerAnipryl®-related deferred revenue.

EBITDA
margin grew from 14.7% in 2002 to 20.3% (16.0%, excluding the impact of the positive non-recurring items) in 2003.

Depreciation
and amortization expense associated with continuing operations for the quarter ended December 31, 2003 increased 17.2% over 2002 following the commencement of
depreciation charges on completed capital projects in the latter part of 2002 and third quarter of 2003.

Net
financial items associated with continuing operations resulted in charges to income of $1,532,000 compared to $280,000 for the year ended December 31, 2003 due to foreign
exchange translation losses related to the strengthening of the Canadian dollar in 2003 as compared with the positive impact of a weakening Canadian dollar in 2002, the write-off of
$160,000 of bank financing costs resulting from the early repayment of a secured bank term loan and increased borrowing costs in the early portion of 2003.

Minority
interest for 2003 had a contribution to net income of $391,000 compared to $252,000 in 2002 due to losses in the contract manufacturing operations in the first quarter of 2003.

In
addition, the majority of the costs of the Canadian operations are denominated in Canadian dollars. As the level of revenues denominated in U.S. dollars and other foreign currencies
increases relative to the underlying cost structure, which is mostly Canadian dollars, the Company's overall gross profit margins are affected. For 2003, the strengthening of the Canadian dollar,
combined with the growing volume of business denominated in U.S dollars, negatively affected gross profit margins compared to 2002. The impact is reflected within the cost of goods sold and selling,
general and administration lines on the income statement.

Discontinued
operations contributed $8,531,000 of income for the year ended December 31, 2003 compared to a loss of $834,000 in 2002 due to the sale of discontinued operations in
2003 and the after-tax gain related to the $6,500,000 received on the sale of product rights in the first quarter of

48

---



2003
and $9,600,000 received on the sale of product rights in the third quarter of 2003. The tax provision associated with these transactions reduced the Company's deferred tax assets. No cash taxes
are expected to be payable as a result of these transactions.

For
the year ended December 31, 2003, the Company recorded an income tax expense at an effective tax rate of 17.0% as compared to a recovery of 5.9% in 2002 due to recognition in
2002 of tax refunds related to the Company filing amended U.S. returns for its 1998, 1999 and 2000 taxation years. The Company's effective tax rate varies from period to period depending on the level
of income generated from each subsidiary.

The
weighted average number of common shares outstanding in 2003 of 37,114,648 increased over 2002 due to the exercise of options and employee participation shares during 2003 less
shares repurchased for cancellation by the Company.

Comparison of 2002 to 2001

Consolidated revenues from continuing operations for the year ended December 31, 2002 of $38,640,000 were a record level for the Company, representing an
increase of 14.0% over 2001. An 11.7% increase in product sales coupled with a 23.0% increase in royalty and licensing revenue accounted for the overall increase.

Product
gross margin in 2002 improved to 22.9% of product sales from continuing operations from 18.8% for the same period in 2001 due to a change in revenue mix.

Selling,
general and administration expenses associated with continuing operations was 24.9% of product sales from continuing operations in 2002, relatively unchanged as compared to the
23.5% of product sales from continuing operations in 2001.

Earnings
before interest, income taxes, minority interest, depreciation and amortization, and research and development ("EBITDARD") from continuing operations of $7,694,000 in 2002 was
an annual record for the Company, representing an increase of 40.2% compared to 2001. Expressed as a percentage of total revenues, EBITDARD increased to 19.9% in 2002 from 16.2% in 2001.

Research
and development expenditures associated with continuing operations increased 55.9% in 2002 as compared to 2001 due to increased staffing and additional clinical development
activity involving the Company's pipeline of innovative radiopharmaceutical products.

Depreciation
and amortization expense associated with continuing operations increased 15.1% compared with 2001 following the commencement of depreciation charges on completed capital
projects.

Net
financial items associated with continuing operations in 2002 resulted in a higher expense in 2002 due to a strengthening Canadian dollar in 2002 compared with 2001, partially
offsetting the impact of lower interest rates.

Minority
interest in 2002 contributed positively to net income by $252,000, a $34,000 decline compared to 2001 due to the reduction in DPI's net loss.

Net
loss from discontinued operations in 2002 was $834,000 as compared to $569,000 in 2001 due to higher operating expenses including severance costs related to the restructuring of the
Company's corporate scientific and regulatory affairs group, partly offset by higher product gross margins.

The
only significant non-recurring items in 2002 were net after-tax offering costs of $251,000 and a tax recovery of $418,000. The only significant
non-recurring item in 2001 was a $3,300,000 charge associated with the revaluation of the Company's income tax assets.

49

---



In
December 2001, the Company filed amended U.S. returns for its 1998, 1999 and 2001 taxation years. In June 2002 the Company was notified by the U.S. Internal Revenue
Service that its revised filing position had been accepted and related refunds aggregating $418,000 were recognized in the second quarter of 2002 as a reduction in income tax expense.

In
June 2001, the Governments of Canada and Ontario enacted legislation implementing gradual reductions in their respective corporate income tax. Following full implementation of
the reductions, the effective tax rate applicable to the Company's Canadian operations will decline to approximately 31%. Accordingly, in 2001, the Company recorded a non-cash charge of
$3,300,000 to reduce the carrying value of its deferred income taxes. Although this development caused the Company to reduce the carrying value of its income tax assets, future periods will benefit
from a significant reduction in Canadian income tax rates.

Excluding
non-recurring items, for the twelve month period ended December 31, 2002 the Company recorded an income tax expense (expressed as a percentage of
pre-tax
earnings) of 12.5% as compared to a recovery of 14.4% in 2001. During 2002, the Company had indicated that it had expected its 2002 effective tax rate to be in the 20%-25% range. The lower
actual rate for 2002 was due to an unforeseen shift in profit mix in the later half of 2002.

The
weighted average number of common shares outstanding in 2002 increased 1.1% to 36,981,985 over 2001 due to the exercise of options and employee participation shares.

Radiopharmaceuticals

Years Ended December 31,2003

2002

2001(in thousands of U.S. dollars)
(U.S. GAAP)RevenuesProduct sales

$
14,564

$
9,704

$
6,763Royalty and licensing


1,521


451


192$
16,085

$
10,155

$
6,955EBITDA (pre-R&D)

$
7,208

$
2,702

$
1,779% of Revenues


44.8
%

26.6
%

25.6
%R&D


(1,594
)

(1,996
)

(1,280
)EBITDA


5,614


706


499Depreciation and amortization


(843
)

(716
)

(623
)Income (loss) from operations

$
4,771

$
(10
)
$
(124
)


Radiopharmaceuticals
and radiotherapy devices are the focus of the Company's radiopharmaceutical subsidiary, DRAXIMAGE, which discovers, develops, manufactures and markets diagnostic
imaging and therapeutic radiopharmaceutical products for the global marketplace. Products currently marketed by DRAXIMAGE include a line of lyophilized Technetium-99m kits used in nuclear
medicine imaging procedures, a line of imaging and therapeutic products labelled with a variety of isotopes including radioiodine, and BrachySeed®, second-generation brachytherapy implants.
DRAXIMAGE has a number of products in late-stage development including FIBRIMAGE®, currently in Phase III, for imaging deep vein thrombosis;INFECTON®,
currently in Phase II clinical development, for imaging infection; andAMISCAN, currently in Phase II, for the early diagnosis of acute
myocardial infarct. DRAXIMAGE is also developing a somatostatin-based peptide that has potential for cancer imaging and therapy.

50

---



Highlights
in this segment for the year ended December 31, 2003 included:



Comparison of Years Ended December 31, 2003 and 2002

Revenues for the radiopharmaceutical segment for the year ended December 31, 2003 increased $5,930,000 or 58.4% over 2002 largely driven by sodium iodide
I-131 sales to the U.S and by the recognition of $1,436,000 of deferred revenue related to the termination of the agreements with the BrachySeed® licensee in the U.S in the first quarter of 2003.

51

---



Shipments
ofBrachySeed® I-125 to the U.S. and Canada for the year ended December 31, 2003 decreased
compared with 2002. Shipments ofBrachySeed® I-125 to the U.S. remain below levels attained in 2002 following the termination of
agreements with the Company's former U.S. licensee and the establishment of a direct sales strategy in the first quarter of 2003.

Research
and development expenditures for this segment decreased in 2003 as compared to 2002 as a result of higher than normal spending in the fourth quarter of 2002 for third-party
toxicity testing ofFIBRIMAGE® andAMISCAN.

EBITDA
and EBITDA margin increased for the year ended December 31, 2003 largely due to increased product sales driven by sodium iodide I-131 sales to the U.S., the
receipt of insurance proceeds, and the recognition in the first quarter of 2003 of $1,436,000 of deferred revenue related to the termination of the agreements with the BrachySeed® licensee partially
offset by costs associated with commencement of direct sales of BrachySeed® in the U.S.

For
the year ended December 31, 2002,BrachySeed® net contribution to EBITDA was approximately breakeven on
$1.8 million of revenues. Included in 2002 results were $1.0 million of inventory losses associated with the Palladium version of BrachySeed®.

Depreciation
and amortization expense for this segment increased slightly for the year ended December 31, 2003 compared to 2002 due to capital projects completed in 2002.

Comparison of 2002 to 2001

Total revenues for the radiopharmaceutical segment in 2002 of $10,155,000 were an annual record representing an increase of 46.0% over 2001. The 43.5% increase in
product sales was primarily attributable to increased sales of Sodium Iodide I-131 radiotherapy capsules, which were launched in the fourth quarter of 2001, diagnostic imaging products,
andBrachySeed® implants.

Revenues
in 2001 were negatively affected by supply disruptions associated with the previously outsourced supply of the Company's line of lyophilized diagnostic imaging products. For the
year ended December 31, 2002, U.S. sales of these products increased 21.4% as compared to 2001.

During
2002 DRAXIMAGE completed the installation of three newBrachySeed® production lines at its FDA-approved
facility, incorporating robotic assembly units for efficient production and greater product quality.

In
the second quarter of 2002, the Company received a $1,000,000 non-refundable fee related toBrachySeed®
Pd-103 bringing the total of non-refundable fees received from its U.S.BrachySeed® licensee to $2,000,000. Up to
December 31, 2002, non-refundable fees under this collaboration have been deferred and recognized as revenue on a straight-line basis over the period to
December 31, 2010.

EBITDARD
for 2002 for this segment of $2,702,000, or 26.6% of revenues, was an annual record, representing an increase of 51.9%, compared to income of $1,779,000, or 25.6% of revenues,
in 2001.

Research
and development expenditures for this segment increased to $1,996,000 in 2002 as compared to $1,280,000 in 2001 due to increased development activity involving the Company's
radiopharmaceutical product pipeline.

For
the year ended December 31, 2002,BrachySeed® net contribution to EBITDA was approximately breakeven on
$1.8 million of revenues. Included in 2002 results were $1.0 million of inventory losses associated with the Palladium version of BrachySeed®. In December 2002, manufacturing and sale
ofBrachySeed®
Pd-103 were suspended to reduce inventory losses which had been incurred for a period of several months during which production, based on its U.S. licensee's projected sales, significantly
exceeded actual sales.

52

---



Depreciation
and amortization expense for this segment increased 14.9% from 2001 following the commencement of depreciation of the expanded radiopharmaceutical production facility.

In
2002, the Company strengthened its radiopharmaceutical management team with the addition of Dr. George Desypris as Director of Clinical Development and Mr. Giovanni
Venditti as Director of Sales and Marketing. In 2001, DRAXIMAGE added Dr. Edward Bump as Director of Research.

Manufacturing

Years Ended December 31,2003

2002

2001(in thousands of U.S. dollars)
(U.S. GAAP)RevenuesProduct sales

$
26,985

$
20,946

$
20,460EBITDA

$
1,084

$
627

$
149% of Revenues


4.0
%

3.0
%

0.7
%Depreciation and amortization


(1,448
)

(1,166
)

(867
)Loss from operations

$
(364
)
$
(539
)
$
(718
)


Manufacturing
comprises the Company's manufacturing subsidiary, DPI, and product sales ofAnipryl® produced for
Pfizer Inc. DPI is a pharmaceutical contract manufacturer with capabilities in a broad range of dosage forms, specializing in liquid and lyophilized (freeze-dried) injectables and other sterile
products. Operating out of a cGMP-compliant 247,000-square-foot facility located in Montreal, Canada, DPI manufactures pharmaceutical products for DRAXIMAGE, as
well as for over 20 other pharmaceutical clients for many international jurisdictions.

Highlights
in this segment for the year ended December 31, 2003 included:



Subsequent
to Year End the Company Announced:



53

---





Comparison of the Years Ended December 31, 2003 and 2002

Total revenues for the manufacturing segment for 2003 of $27.0 million were 28.8% higher compared with 2002 primarily due to commercial production of Hectorol® Injection and production under the Company's GSK manufacturing agreement.

EBITDA
for this segment for the year end December 31, 2003 increased $457,000 and EBITDA margin increased from 3.0% to 4.0% over 2002. This was the result of the positive impact
of increased product sales and changes in product mix driven by new business including the production ofHectorol® Injection and production
related to the GSK manufacturing agreement, partially offset by costs associated with developing new business, training related to the ramping up of sterile production resources, and the unfavorable
impact of reduced production in the month of December 2003 related to normal maintenance and capital installation requirements. Included in EBITDA is a portion of the insurance proceeds which
were recorded as a reduction in cost of goods sold in the third quarter of 2003.

EBITDA
and EBITDA margin for the year ended December 31, 2003 were negatively affected by production disruptions early in the first quarter of 2003 in sterile operations due to
equipment and related problems which were resolved during the first quarter and the costs associated with new product introductions. EBITDA margin over the last three quarters of 2003 was
approximately 7.8%.

During
2003, the operating results of the contract manufacturing section were negatively affected by the increased level of activity of introducing new products. The introduction of new
products to the sterile operations of contract manufacturing results in increased costs because of the amount of capacity which is utilized in the process, the higher risk of batch failures and the
ramping up of production staff in preparation for commercial volumes. In particular, the ramping up of production staff to meet the ultimate capacity demands once new products are approved and
commercial production can begin, usually results in a three-month training for production staff in which no revenue is generated from their activities. This reduces the overall EBITDA margin. In
addition, the timing of regulatory for new products is difficult to estimate due to the nature of the regulatory approval process. As the
commercialization of new products increases in the future relative to the activity level of introducing new products, a positive impact on EBITDA margins is expected.

Depreciation
and amortization expense of $1,448,000 for this segment for the year ended December 31, 2003 increased 24.2% over the same period in 2002, following the commencement
of depreciation on completed capital projects in late 2002 and the third quarter of 2003.

Comparison of 2002 and 2001

Revenues for the twelve month period ended December 31, 2002 were flat despite increased new business, the commencement of shipments of lyophilized
products principally to DRAXIMAGE and increasedAnipryl® product sales to Pfizer Inc., all of which was offset by lower volumes of
lower margin, legacy products.

DPI's
regular summer shut-down was completed in July 2002. The entire sterile area, including lyophilization, was affected by the 2002 shutdown. This resulted in
slower than anticipated ramp-up in sales in the third quarter and much of the fourth quarter of 2002.

In
2002, the Company announced that it had received approval from the FDA to transfer the production of previously outsourced DRAXIMAGE lyophilized imaging products to DPI.
Ramp-up of

54

---



lyophilization
production in 2002 was slower than anticipated due to production start-up issues in this new manufacturing area.

In
December 2001, DPI finalized supply and related agreements with GSK for the renewal and expansion of an existing contract manufacturing relationship between the companies. The
products being transferred to DPI are all established, sterile products currently marketed by GSK in multiple international markets.

In
2002, an additional, established sterile product was added under this contract. U.S. regulatory approval for the site transfer of this product, the first under the new DPI/GSK
contract destined for the U.S. market, was received and commercial production of this product commenced in the second quarter of 2002.

During
2002, site transfer and related activities associated with the other GSK products continued at a high level. In January 2003, DPI received formal approval from the U.K.
Medicines Control Agency to manufacture several products destined for the U.K. and major European markets. The authorization includes products being transferred to DPI under the GSK contract.

In
2002, DPI was selected by Bone Care to be a manufacturer ofHectorol® Injection, an FDA approved D-hormone
product used in the treatment of secondary hyperparathyroidism in chronic renal dialysis patients.

Also
in 2002, DPI was designated by Axcan Pharma Inc. as a commercial manufacturing site for its lyophilized biological product, Photofrin® photodynamic therapy used
to selectively palliate, cure or prevent various forms of malignant cancers.

EBITDA
for this segment of $627,000 for 2002 was an annual record representing an increase of $478,000 from $149,000 in 2001. The EBITDA margin for this segment increased to 3.0% for
2002 compared to 0.7% in 2001. The improvement in operating profitability was attributable to higher margin products.

Depreciation
and amortization expense for this segment increased 34.5% from 2001 following the commencement of depreciation charges on completed capital projects.

In
2002, the Company announced a three year, $12 million capital plan for DPI including a tripling of DPI's existing lyophilization capacity, new sterile manufacturing
capabilities to support recently announced contracts, improvements to production line efficiency, and improvements to infrastructure and supporting systems to maintain DPI at the forefront of
regulatory compliance.

The
second lyophilizer, with 24 square meters (254 square feet) of freeze-drying shelf space, will be incorporated into DPI's existing lyophilization facility, which currently houses a
highly automated, integrated system with 11 square meters (120 square feet) of shelf space. The specialized facility was originally designed to readily accommodate this second lyophilizer at a cost
significantly less than that of the initial installation with minimal disruption to ongoing production. The two units, both of which are supplied by BOC Edwards, will provide total annual capacity
equivalent to five to six million 10 mL vials of lyophilized product.

In
early November 2002, DPI commissioned its new raw material storage and dispensing area, which improved cGMP compliance and provided an improved environment for the handling and
dispensing of raw materials. This installation will improve the flow of material and personnel and is equipped with a new ventilation system and state-of-the-art
dust containment technology. This project, which is part of DPI's three-year capital plan, was completed both on time and within original cost estimates.

55

---



Corporate and Other

Years Ended December 31,2003

2002

2001(in thousands of U.S. dollars)
(U.S. GAAP)RevenuesProduct sales(1)

$
(1,014
)
$
(312
)
$
(72
)Royalty and licensing


7,137


7,851


6,560$
6,123

$
7,539

$
6,488EBITDA

$
3,275

$
4,365

$
3,561% of Revenues


53.5
%

57.9
%

54.9
%Depreciation and amortization


(996
)

(922
)

(946
)Income from operations

$
2,279

$
3,443

$
2,615


---

The
Corporate and Other segment comprises deferred revenues, royalties and expenses associated with the Company's business agreements with Pfizer Inc. with respect to Anipryl®, royalties and
expenses from GlaxoSmithKline Consumer Healthcare with respect to the SpectroPharm® line of products,
revenues and directly attributable expenses associated withAlertec®, non-allocated corporate expenses and inter-segment
eliminations. Effective July 22, 2003 revenues and expenses directly related withAlertec® are no longer included in this segment
sinceAlertec® was included in the divestiture of DRAXIS Pharmaceutica (see Corporate MattersSale of
Discontinued Operations). Milestones and royalties deriving from the divestiture of DRAXIS Pharmaceutica are included in this segment.

The
Company follows a policy of not allocating its central corporate expenses to its operating business segments. Highlights in this segment for the year ended December 31, 2003
included:



Comparison of Years Ended December 31, 2003 and 2002

Royalty and licensing revenue in this segment for the year ended December 31, 2003 of $7,137,000 decreased compared to 2002 due to the previously announced
elimination of minimum royalty income related toAnipryl® effective January 1, 2003, which more than offset the royalties related to
the sale of products to Shire coupled with payments received from Ceva.

56

---



EBITDA
and EBITDA margin decreased for the year ended December 31, 2003 due mainly to the previously announced elimination of minimum royalty income related to Anipryl® effective January 1, 2003
partially offset by royalties related to the sale of product rights to Shire coupled with payment
received from Ceva.

Depreciation
and amortization expense in this segment in 2003 was largely unchanged as compared to 2002.

Comparison of 2002 to 2001

Royalty and licensing revenue in this segment in 2002 increased 19.7% as compared to 2001. The increase was attributable to increased minimum royalty amounts from
Pfizer Inc. with respect toAnipryl®.

EBITDA
for this segment in 2002 increased $804,000 over 2001 levels due to increased minimum royalty amounts from Pfizer Inc. with respect to Anipryl®, combined with a higher contribution fromAlertec® offsetting
inter-segment eliminations.

Depreciation
and amortization expense for this segment in 2002 declined slightly compared to 2001.

Liquidity and Capital Resources

Years Ended December 31,2003

2002

2001(in thousands of U.S. dollars)
(U.S. GAAP)Cash and cash equivalents

$
10,563

$
4,899

$
5,602Restricted cash

$
976





Non-financial working capital (net)(1)

$
12,780

$
6,284

$
8,106Total debt

$
10,466

$
13,610

$
9,726


---

Cash
and cash equivalents at December 31, 2003 totaled $10,563,000 as compared with $4,899,000 as at December 31, 2002 and $5,602,000 as at December 31, 2001.

In
conjunction with the divestiture of DRAXIS Pharmaceutica to Shire, $976,000 of the cash proceeds are held in trust under an escrow agreement. The release of this amount under escrow
is dependent upon whether or not claims by Shire have been made to the Company by certain dates with respect to any breach of the representations and warranties made by the Company to Shire or any
failure of the Company to perform its obligations under the divestiture agreement.

The
Company follows a policy of investing its surplus cash resources in high-quality, liquid, short-term commercial paper and government Treasury bills and money
market mutual funds that invest in high-quality short-term securities. As at December 31, 2003, December 31, 2002 and December 31, 2001 there were no
restrictions on the flow of these funds nor have any of these funds been committed in any way. There are certain standard financial liquidity ratio requirements pursuant to DPI's term loan that could
restrict the free flow of funds from one subsidiary of the Company to another.

Cash
flows from continuing operations, before changes in working capital, for 2003, were positive $1,706,000 as compared to a cash outflow of $1,773,000 in 2002. Cash flows used in
continuing

57

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operations,
before changes in working capital, in 2002, were $1,773,000 as compared to usage of $2,306,000 in 2001. The increase relates to improving EBITDA in 2002.

Non-financial
working capital increased from $6,284,000 as at December 31, 2002 to $12,780,000 as at December 31, 2003 due to higher accounts receivable related
to the ramp up in product volumes during the year and reduction in trade payables. Non-financial working capital declined to $6,284,000 as at December 31, 2002 from $8,106,000 as at
December 31, 2001 due to lower current deferred income taxes and increased accounts payable.

Cash
flows from discontinued operations for 2003 were $16,123,000 as compared to a cash outflow of $439,000 in 2002. The improvement in 2003 relates to proceeds from the disposition of
discontinued operations during the year.

Cash
flows used in discontinued operations in 2002 were $439,000 as compared to a cash inflow of $75,000 in 2001. The decrease in 2002 was due to the decline in EBITDA from discontinued
operations.

Deferred
revenue continued to decline in 2003, which is attributable to amortization of deferred revenues related to milestones of prior years and the recognition related to the
termination of the agreement with the brachytherapy licensee in the U.S. in the first quarter of 2003. The increase in 2002 was due to commencement of amortization of non-refundable fees
related toBrachySeed®.

Deferred
revenue amortization, which continues to be a significant source of non-cash earnings to the Company, was relatively flat compared to 2002 as the elimination of the
minimum royalty income related toAnipryl® was offset by recognition in the first quarter of 2003 of $1,436,000 of deferred revenue related
to the termination of the agreements with theBrachySeed® licensee.

Capital
expenditures for the year decreased from $5,390,000 in 2002 to $3,536,000 for 2003 due to timing of the installation, and payments related to the second lyophilizer project are
attributable to expenditures under the previously announced capital plan for the contract manufacturing segment.

Capital
expenditures in 2002 of $5,390,000 increased from $5,363,000 in 2001 related to its three-year $12 million capital plan announced in 2002.

In
March 2002, co-incident with the announcement of DPI's new capital plan, the Company entered into a number of financing arrangements providing for up to $7,400,000
in debt and equity from DPI's shareholders and up to $3,000,000 in debt financing from Investissement Québec. As of December 31, 2003, the maximum amounts of debt and equity had
been fully subscribed by DPI's shareholders and $1,741,000 of debt financing had been provided by Investissement Québec. In April 2004, the Company used the proceeds of a public
offering to repay $3,072,975 (CDN$4,179,861) in
debt owed by DPI to SGF and $1,663,909 (CDN$2,263,249) in debt owed by DPI to Investissement Québec.

Total
debt at December 31, 2003 totalled $10,466,000 as compared with $13,610,000 at December 31, 2002. During 2003, the Company reduced its outstanding third-party debt
through the repayment of its secured revolving credit facility at DPI and the repayment of its unsecured subordinated obligation related to the in-licensing of Permax®. The increase in debt is
related to the strengthening of the Canadian dollar for 2003 as all third-party debt is denominated in
Canadian dollars.

As
at December 31, 2003, the Company's debt was comprised as follows:



58

---





Proceeds
from the issuance of treasury common shares by the Company attributable to the exercise of options and employee participation shares generated $593,000 for the year ended
December 31, 2003, as compared to $844,000 for the same period of 2002.

For
the years ended December 31, 2003 and 2002, the Company received $225,000 and $792,000, respectively, from the issuance of treasury shares by DPI, net of the repurchase of
shares held by minority interest.

The
Company did not make any acquisitions in 2003, 2002 or 2001.

The
Company was in compliance with all lending covenants as at December 31, 2003 and 2002, except with respect to a minimum working capital requirement on December 31, 2002
under the DRAXIS Health Inc. credit agreements. A waiver has been received with respect to the non-compliance to this covenant.

For
information on the maturity profile of the Company's debt, see Note 18 to the Company's Consolidated Financial Statements and Notes, beginning on page F-1.

59

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Commitments

The following table summarizes the Company's major contractual cash obligations as of December 31, 2003:

Years Ended December 31,2004

2005

2006

2007

2008(in thousands of U.S. dollars)Long-term debt

$
981

$
1,416

$
1,416

$
4,582

$
2,071Operating leases

$
275

$
205

$
158








In
addition to the above, the Company is obligated to make certain royalty payments based on related product sales and milestone payments based on the achievement of certain specified
events.

Outlook

The Company's primary operational focus for 2004 continues to be: (i) improving near-term financial and operational performance of its
radiopharmaceutical and manufacturing businesses through increasing sales of existing products and services, improving manufacturing efficiency and effectiveness, and obtaining additional regulatory
approvals; and (ii) securing and advancing its base for long-term growth through the development of its existing product pipeline as well as identifying new business opportunities
that are consistent with the Company's capabilities and that contribute to the long-term value of the Company.

The
Company's longer term objective for its radiopharmaceutical business is to leverage its existing business base and record of regulatory approvals to become a significant North
American and international competitor in this highly specialized market through a combination of increasing sales of existing products, the identification and commercialization of additional product
opportunities, development of its new product pipeline and possible acquisitions, consistent with its well-defined business focus.

DRAXIMAGE
is expected to continue to grow in 2004 through increasing sales of existing products in the U.S., introduction of new products into the U.S. and expansion into Europe.

Sales
ofBrachySeed® implants are expected to increase from 2003 levels following direct marketing, sales and distribution
strategies which were implemented in 2003. Management expects that continued emphasis on quality, customer service and pricing will be the key factors for the future success of BrachySeed®.

In
2004, the Company expects to substantially increase its investment in research and development activities of its radiopharmaceutical product pipeline, specifically FIBRIMAGE®andINFECTON®over 2003 levels to support the Phase III trial ofFIBRIMAGE®and the Phase II and Phase III trials ofINFECTON®.

The
Company believes that long-term growth potential for DRAXIMAGE should be divided between the potential for its innovative proprietary radiopharmaceutical products
currently under development and opportunities excluding these products. Although each of DRAXIMAGE's pipeline products under development addresses substantial unmet market needs and thus has
considerable potential, two of these products are at advanced stages of development.FIBRIMAGE®is completing its Phase III program and INFECTON®has embarked on its Phase II program. Nevertheless, given the inherent uncertainties associated with new drug development, it is
difficult to predict if, or when, any of these products will achieve commercialization.

Excluding
the potential impact of the radiopharmaceutical products currently under development, the Company's target continues to be to achieve radiopharmaceutical revenues of
$30 million to

60

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$35 million
(representing more than three times its 2002 base) by 2007, together with improving profitability margins. Specifically for 2004, revenue is expected to grow between 30% and 35%.
EBITDA margin is expected to be between 23% and 28% including the ramp up of research and development spending related to Phase III clinical trials of both FIBRIMAGE® andINFECTON®.

The
Company's longer term objective for its manufacturing business is to leverage its existing capabilities and its excellence in regulatory compliance to increase third-party contract
manufacturing revenues while managing costs in order to achieve improving levels of profitability associated with increased capacity utilization. Capacity utilization at DPI varies by production flow.
The demand for DPI's sterile, including lyophilized and non-lyophilized product, capacity continues to grow and create challenges. During 2003, additional production shifts were added to
meet customer demand within the framework of DPI's existing production processes and systems. The Company expects that an increase in capacity through additional production shifts, production
efficiencies and capital investment will be required in 2004 given the increased customer demand. Unlike DPI's sterile operations which continue to grow, the non-sterile operations
continue to run significantly below its current one-shift capacity. In 2004, DPI will seek to increase capacity utilization of the non-sterile area by maximizing utilization of
its current one-shift configuration.

In
2004, DPI will also be focused on the completion of its three-year, $12 million capital plan, including the installation of the second lyophilizer, which will
triple DPI's current capacity in this highly specialized area. Installation and a rigorous validation process before commercial production can begin is expected to be completed in the second half of
2004. Significant contribution is not expected before 2005.

The
Company's target is to achieve manufacturing revenues by 2007 from its Montreal facility of $40 million to $50 million (representing more than two times its 2002 base)
together with improved profitability margins of between 15% to 20%. For 2004, the Company expects revenue growth of between 20% and 25% coupled with improving EBITDA margins of 8% to 12% by the end of
2004.

In
general, the timing of regulatory approvals will be the major factor determining the rate of revenue and earnings growth for both the Company's radiopharmaceutical and manufacturing
businesses.

In
2004, the Company's Corporate and Other segment is expected to experience an increase in revenue over 2003 levels mainly driven by full-year royalties related to the sale
of product rights
to Shire and any contingent milestone payments which may become payable to the Company during the year pertaining to these said product rights.

The
Company's balance sheet at the end of December 2003 reflects a marked improvement in the financial position of the Company. The completion of the divestiture of the remaining
assets and liabilities of DRAXIS Pharmaceutica provides the Company with increased flexibility to execute on its strategic plan to focus on the core radiopharmaceutical and specialty contract
manufacturing businesses. Increased liquidity combined with the senior management realignment will be directed toward achieving the objective of enhancing the value of DRAXIS' core businesses. The
Company has significantly reduced its debt levels and plans to continue to reduce and/or restructure its existing third-party debt arrangements in a manner consistent with best serving the future
growth of its core businesses.

Management
expects operating cash flow to be positive in 2004 and expects continued growth over 2003 operating cash flow levels.

Management
expects completion of its three-year $12 million capital plan in 2004 and, accordingly, expects capital expenditures to be slightly higher in 2004 compared
to 2003. The focus of future capital expenditures will be to increase and improve on the efficient utilization of its sterile manufacturing capacity in 2004.

61

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With
the Company's current cash balances, reduced operating cash requirements and established financing arrangements, management expects to have sufficient liquidity available to fund
the Company's cash requirements in 2004. Any investments or acquisitions of businesses, products or technologies may require additional funding.

Most
of the Company's cash is held in Canadian funds; the remainder is held in U.S. funds. All of the Company's borrowings are at a variable interest rate based on the prime rate.
Further details are included in Note 18 to the 2003 consolidated financial statements.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

Tabular Disclosure of Contractual Obligations

|                                                                                     |  | Payments due by period
(in thousands of U.S. dollars)
|------------------------------------------------------------------------------------ |  | -----------------------------------------------------
|
|Long-Term Debt Obligations                                                           |  | 10,466                                               
|Capital (Finance) Lease Obligations                                                  |  |                                                     
|Operating Lease Obligations                                                          |  | 638                                                  
|Purchase Obligations                                                                 |  |                                                     
|Other Long-Term Liabilities Reflected on the Company's Balance Sheet under U.S. GAAP |  |                                                     
|                                                                                     |  |                                                      
|Total                                                                                |  | 11,104                                               

See
also Note 22 to the 2003 consolidated financial statements.

Accounting Matters

Critical Accounting Policies and Estimates

The foregoing discussion and analysis of the financial condition and results of operations is based upon the Company's consolidated financial statements, which
have been prepared in accordance with U.S. GAAP. The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates and makes adjustments as
appropriate. Actual results may differ from these estimates under different assumptions or conditions.

A
summary of the significant accounting policies and methods used by the Company in the preparation of its consolidated financial statements is included in Note 2 to the 2003
audited consolidated financial statements. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its
consolidated financial statements.

Recognition of Licensing RevenueLicense and other forms of non-refundable fees received pursuant to collaboration
agreements are accounted for according to the related contractual agreements. In general, such fees are deferred and recognized on a straight-line basis over the lesser of the contract
period and the estimated term over which contractual benefits are expected to be derived. If payment of such fees is contingent upon future performance obligations of the Company or other future
events, revenue recognition of such amounts is deferred and recognized upon completion of the specific event.

62

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Deferred Tax AssetsRealization of the net deferred tax assets is dependent on the Company's ability to generate sufficient
taxable income in certain tax jurisdictions. Management believes that it is more likely than not that the assets will be realized, based on forecasted income. On a quarterly basis, the estimates and
assumptions underlying the forecasted income are reviewed by management to determine whether additional valuation allowances are warranted.

Termination of BrachySeed® Agreements

In January 2003, DRAXIMAGE's agreements with itsBrachySeed® licensee in the U.S were
effectively terminated with no further transactions taking place under the agreements. A formal agreement was subsequently reached with the licensee for terminating both the License and Distribution
Agreement and Product Manufacturing and Supply Agreement forBrachySeed® implants in the U.S.

Under
the terms of the original agreements, non-refundable milestone payments received from the licensee were deferred and amortized into income over the contractual period
of the agreement to December 31, 2010. As a result of the termination of the agreements in January, the unamortized portion of the non-refundable milestone payments of $1,436,000
was included in income for the year ended December 31, 2003 as royalty and licensing revenue.

Discontinued Operations

Commencing with the quarter ended December 31, 2001, the results of operations of DRAXIS Pharmaceutica have been reported as discontinued operations.
Commencing in the second quarter of 2002, the revenues and expenses related toAlertec® were included in the results related to continuing
operations and not discontinued operations due to management's decision in 2002 to retain the Canadian product rights due to the uncertainty of being able to obtain the third-party
approval required to be able to include these rights as part of the divestiture of DRAXIS Pharmaceutica. As a result of attaining the required third party approval, the Canadian product rights to Alertec® were included in the sale of the remaining assets and liabilities of DRAXIS Pharmaceutica to Shire.

Insurance Proceeds

On July 28, 2003, DRAXIS received insurance proceeds of $730,000 in settlement of physical damage and business interruption losses related to installation
problems of its first lyophilizer unit in 2000. The damage resulted in, amongst other things, delays in the commissioning of the lyophilization unit and in obtaining FDA approvals for the transfer of
production of the DRAXIMAGE line of lyophilized diagnostic imaging products to DPI. FDA approval was ultimately obtained in 2001 and costs incurred related to the incident were charged to the
statement of operations when incurred. No accrual for insurance proceeds had been previously recorded as the claim represented a contingent gain. As a result of the cash receipt and settlement of its
claim, the Company recorded as a reduction in cost of goods sold, the amount of the insurance claim received to match where costs associated with claim were previously charged.

Recent Accounting Pronouncements



DRAXIS has determined it will not adopt the fair value basis of accounting under U.S. GAAP using the transitional provisions applicable to Company in accordance
with FAS 148 Accounting for Stock-Based CompensationTransition and Disclosure. DRAXIS will adopt the fair value basis of accounting under U.S GAAP if and when the fair value basis
of accounting becomes mandatory (see Note 20(d)).

63

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For
a summary of other recent accounting pronouncements, see Note 26 to the Company's 2003 consolidated financial statements.

Non-GAAP Measures

The terms EBITDARD, EBITDA (pre R&D), EBITDA and net income and earnings per share before non-recurring items used herein do not have standardized
meanings prescribed by U.S. GAAP and therefore may not be comparable to similar measures used by other companies. DRAXIS uses such terms as measures to assess the operating performance of its
on-going businesses and believes that most shareholders and investors prefer such measures, since they are consistent with industry practice for analyzing operating performance. Such
measures are used consistently and explicitly defined, and excluded charges are clearly identified. Such measures should not be construed as the equivalent of net cash flows from operating activities.

Item 6. Directors, Senior Management and Employees

The following is a list of the current directors and senior officers of the Company, their municipalities of residence, their current position with the Company
and their principal occupations:

Martin
Barkin                        Toronto,
ON                        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 the President and Chief Executive Officer of the Company. He also serves on the Board of Viventia Biotech Inc. and the medical
advisory board of VenGrowth Investment Funds. Until April 30, 2004, he was a director of Bone Care International, Inc. Dr. Barkin was Chairman of the Board of Sunnybrook &
Women's College Health Sciences Centre from June 15, 1998 until June 30, 2003. Dr. Barkin came to the Company in 1992 from KPMG where he was Partner and National Practice Leader
for Health Care (1991-1992). Before that, he was Deputy Minister of Health for the Province of Ontario (1987-1991). Dr Barkin is a surgical specialist in Urology, a former
Research Scientist at University of Toronto and Division Chief at Sunnybrook Health Sciences Centre.

Leslie
L. Dan                        Toronto,
ON                        Director

Director
since December 10, 1993.

Mr. Dan
is Chairman of Novopharm, one of Canada's leading pharmaceutical companies. Prior to April 5, 2000, Mr. Dan was Chairman and Chief Executive Officer of
Novopharm.

George
M. Darnell                        Coral Gables,
FL                        Director

Director
since November 26, 1996.

Mr. Darnell
is a former senior executive of Baxter Corporation and has 35 years of U.S. and international experience in the diagnostic industry.

Rolf
H. Henel                        Wayne,
NJ                        Director

Director
since August 14, 2002.

Mr. Henel
is the retired President of Cyanamid International Lederle Division. He currently serves as an advisor to the healthcare industry and is a partner in Naimark &
Associates, a healthcare consulting firm. He is also a director and member of the Audit Committee of both SciClone Pharmaceuticals and Penwest Pharmaceuticals.

64

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Brian
M. King                        Kenora,
ON                        Chairman and Director

Director
since May 26, 1994.

Mr. King
is the Chairman of the Board of the Company. He is the former Chairman and Chief Executive Officer of Connaught Biosciences, Inc. He is also a director of Onex
Corporation, the VenGrowth Investment Funds and the Health Care and Biotechnology Venture Fund.

Samuel
Sarick                        Toronto,
ON                        Director

Director
since March 31, 1989.

Mr. Sarick
is President of Samuel Sarick Limited, a company with long-standing involvement in commercial property development. He is also a director with The Goldfarb
Corporation.

Stewart
D. Saxe                        Toronto,
ON                        Director

Director
since November 11, 1987.

Mr. Saxe
is an international Partner with the law firm of Baker & McKenzie. He is Managing Partner of the firm's Canadian offices and a member of this global firm's Policy
Committee, its equivalent of a board of directors. He is certified by the Law Society of Upper Canada as a specialist in labor law and as a Human Resources Professional by the Human Resources
Professionals Association of Ontario.

Bruce
W. Simpson                        Fort Worth,
TX                        Director

Director
since August 14, 2002.

Mr. Simpson
served as the President of the Genpharm division of E Merck, the President and CEO of Medeva Pharmaceuticals in the United States and in senior management positions at
Fisons Corporation. He currently heads a private consulting firm specializing in marketing and business development within the healthcare industry.

John
A. Vivash                        Toronto,
ON                        Director

Director
since November 17, 1998.

Mr. Vivash
was formerly President and Chief Executive Officer of CIBC Securities Inc. He also was President and Chief Executive Officer of Fidelity Investments Canada
Limited and Manulife Securities International Ltd. He is currently President and Chief Executive Officer of Tesseract Financial Inc. (formerly Vivash Consulting Inc.), a financial
services consultancy.

Mark
Oleksiw                        Montreal,
QC                        Officer

Officer
since July 2003.

Mr. Oleksiw
joined DRAXIS as Director of Finance in July 2002 after eight years with an international accounting firm, most recently as a senior manager with a focus on
U.S. and Canadian publicly listed life science and technology companies. He also spent three years with Bell Canada and BCE Inc. with responsibility for external reporting, plus two years as a
senior internal auditor at McGill University. Mr. Oleksiw is a Chartered Accountant and earned his Graduate Diploma in Public Accountancy and B. Com. from McGill University. He became Chief
Financial Officer on July 1, 2003.

Dan
Brazier                        Stouffville,
ON                        Officer

Officer
since August 1998.

Mr. Brazier,
HON. B. COMM., joined DRAXIS in August 1998 as President of SpectroPharm Dermatology and now holds the position of Senior Vice President, Corporate Development
and Strategic Planning. Prior to July 1, 2003, Mr. Brazier served as President of DRAXIS Pharmaceutica. Prior to joining the Company, Mr. Brazier was the Director of Skin Care at
Allergan Inc. Mr. Brazier also held positions in Marketing Management and Sales Management in his 10 years with Allergan.

65

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From
1980-1989, Mr. Brazier held Marketing and Sales positions with Bausch & Lomb, Stafford Foods and Canada Packers. Mr. Brazier holds an Honors B. Comm., majoring in
Marketing and Finance.

Jack
A. Carter                        Toronto,
ON                        Officer

Officer
since September 1998.

Mr. Carter,
B.A., C.H.R.P., joined DRAXIS in September 1998 as Vice President Human Resources following a lengthy relationship with the Company in a Consultant capacity.
Immediately prior to joining DRAXIS, Mr. Carter was the President of a Human Resource Consulting firm, specializing in strategic human resource issues within the Canadian Pharmaceutical
Industry. Prior to this Mr. Carter has gained significant experience as Vice President Human Resources for Sterling 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 Board of Directors of the Human Resources Professionals Association of Ontario, and was
nominated to the "Council of Human Resource Executives" for The Conference Board of Canada.

John
Durham                        Montreal,
QC                        Officer

Officer
since July 2003.

Mr. Durham
is President of DRAXIS Pharma Inc. Prior to joining the Company in July 2003, Mr. Durham was General Manager of an international contract
manufacturer, with responsibilities for operations, finance, sales and marketing, business development and strategic planning.

Richard
Flanagan                        Montreal,
QC                        Officer

Officer
since September 1997.

Dr. Flanagan,
B.Sc., Ph.D., MCIC, is President of DRAXIMAGE. He has been with the Company since its founding in July 1997 and with the same division since 1980 when it was
part of Merck. Dr. Flanagan served as Executive Vice President of DRAXIMAGE until September 1, 2001, when he was named President. Prior to joining Merck, Dr. Flanagan was an
Adjunct Professor in the Faculty of Pharmacy at the University of Alberta. Dr. Flanagan is the author of thirty scientific papers and is listed as inventor on twelve patents.
Dr. Flanagan obtained his Ph.D. in Organic Chemistry from the University of Alberta and a B.Sc. from the University College Dublin, Ireland. He is a Killam Fellow and received the Hugh Ryan
Memorial Gold Medal as an undergraduate. Dr. Flanagan has served as an advisor to the International Atomic Energy Agency and has sat on grant review committees in Canada and the United States.

Jerry
Ormiston                        Toronto,
ON                        Officer

Officer
since May 2001.

Mr. Ormiston,
B.SC., MBA, joined DRAXIS in May 2001 as Executive Director, Investor Relations following a two-year stint as a senior consultant in a Toronto
investor relations firm working with small and mid-sized entrepreneurial companies on capital markets communications strategies. Prior to that he was at Allelix Biopharmaceuticals for
12 yearsfour as Manager of Investor Relations and eight in the business development area. He has 25 years' experience in the healthcare industry in pharmaceuticals and
biotechnology. His assignments over those years have included positions in business development, marketing, corporate communications, production management, quality assurance and regulatory affairs.

Alida
Gualtieri                        Montreal,
QC                        Officer

Officer
since November 2003.

Ms. Gualtieri
joined the Company in November 2003 as General Counsel and Secretary. Prior to joining the Company, she was a partner in the Corporate Finance
Mergers & Acquisitions sector of McCarthy Tétrault 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

66

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(F.T.Q.),
Canada's largest labor-sponsored venture capital fund. Ms. Gualtieri earned her BCL and LLB law degrees at McGill University in 1987 and was admitted to the Bar of the Province of
Quebec in 1988.

Chien
Huang                        Toronto,
ON                        Officer

Officer
since July 2003.

Mr. Huang
joined DRAXIS in 1998 as 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, senior financial planning and analysis and in the audit group of a major international accounting firm. Mr. Huang is a
Chartered Accountant and earned his Graduate Diploma in Public Accountancy from McGill University as well as a B.Sc. from the University of Toronto.

Terms
of office as director and/or officer are for one year or until the next Annual Meeting of the Shareholders and subsequent Meeting of the Board of Directors, respectively.

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

67

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Summary Compensation Table

The following table sets forth all annual and long-term compensation for services in all capacities to the Company and its subsidiaries for the fiscal
years ended December 31, 2003, 2002 and 2001 in respect of each of the individuals who were, at December 31, 2003, the Chief Executive Officer or other named executive officers (as
defined in the Regulations to the Securities Act (Ontario)) of the Company and who received salary and bonus in excess of CDN$150,000 in the 2003 fiscal year.

|                                                                                |  |                |      | Annual Compensation     |  | Long Term Compensation |  |                      | 
|------------------------------------------------------------------------------- |  | -------------- | ---- | ----------------------- |  | ---------------------- |  | -------------------- | 
|
|
|Martin Barkin, MD
President & Chief Executive Officer                           |  | 2003
2002
2001 |      | 320,000
301,600
297,000 |  | 80,000
75,400
73,000   |  | 125,000
nil
109,500  | 
|Dan Brazier
Senior Vice-President, Corporate Development and Strategic Planning |  | 2003
2002
2001 |      | 210,000
165,000
165,000 |  | nil
nil
nil            |  | 79,800
49,500
62,700 | 
|Richard Flanagan
President, DRAXIMAGE Inc.                                      |  | 2003
2002
2001 |      | 216,250
180,000
153,493 |  | nil
nil
nil            |  | 77,850
25,000
10,000 | 
|Mark Oleksiw
Chief Financial Officer                                            |  | 2003
2002      | (9)  | 142,900
47,103          |  | nil
nil                |  | 53,759
4,710         | 
|John Durham
President, Draxis Pharma Inc.                                       |  | 2003           | (10) | 151,667                 |  | nil                    |  | 53,144               | 

---

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Incentive Plans



The Company's philosophy is to link employee compensation to the success of the Company and to emphasize "at risk" employee compensation. Save and except for the
Retirement Compensation Allowance for Dr. Barkin set forth under "Termination of Employment and Employment Contracts," the Company does not provide any form of pension program to its senior
management.

The
Company has implemented the following plans in an effort to achieve "at risk" employee compensation.



The Company has an established guideline limiting the aggregate number of common shares that can be issued at any point in time, either through the exercise of
options or the conversion of Participation Shares, to 13% of the Company's outstanding common shares. As at March 31, 2004, the number of common shares so issuable was 7.3% of the Company's
outstanding common shares.



Intention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 common shares to directors, officers, employees and arm's-length consultants of the Company and its subsidiaries so as to link corporate compensation to enhanced shareholder
value.

Determination
of Number and Price of OptionsThe Board of Directors determines the price per common share and number of options for common shares which may be allotted to
each designated director, officer or employee and all other terms and conditions of the option in accordance with the applicable requirements of any regulatory authority or stock exchange.

Maximum
Common Shares IssuableIn 2001 the shareholders authorized, at the Corporation's annual and special meeting, the issuance of up to 7,500,000 common shares under this
plan.

Options
Available for Future Grants1,387,394 as at March 31, 2004.

Unexercised
options of Named Executive Officers as a percentage of common shares issued and outstanding as of March 31, 20043.5%.

Aggregate
Option Grants to Named Executive Officers in 2003350,000.

69

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The
following table sets forth the options and SARs granted during the financial year ended December 31, 2003:

|Name                                                                            |  | Securities Under
Options/SARs
Granted (#) |  | % of Total
Options/SARs
Granted to
Employees in
Financial Year |  | Exercise or
Base Price
(CDN$/Security)(1) |  | Market Value of
Securities
Underlying
Options/SARs on
the Date of Grant
(CDN$/Security) |  | Expiration Date                              
|------------------------------------------------------------------------------- |  | ----------------------------------------- |  | -------------------------------------------------------------- |  | ----------------------------------------- |  | --------------------------------------------------------------------------------------- |  | ---------------------------------------------
|Martin Barkin, MD
President & Chief
Executive Officer                           |  | Nil                                       |  | N/A                                                            |  | N/A                                       |  | N/A                                                                                     |  | N/A                                          
|Dan Brazier
Senior Vice-President,
Corporate Development
and Strategic Planning |  | 130,000                                   |  | 16.8                                                           |  | 100,000 @ $2.36
30,000 @ $2.32            |  | 100,000 @ $2.85
30,000 @ $2.45                                                          |  | 100,000 @ July 14, 2013
30,000 @ Dec 31, 2007
|Richard Flanagan
President, DRAXIMAGE Inc.                                      |  | 20,000                                    |  | 2.6                                                            |  | 2.32                                      |  | 2.45                                                                                    |  | December 31, 2007                            
|Mark Oleksiw
Chief Financial Officer                                            |  | 100,000                                   |  | 12.9                                                           |  | 2.36                                      |  | 2.85                                                                                    |  | July 14, 2013                                
|John Durham
President, Draxis Pharma Inc.                                       |  | 100,000                                   |  | 12.9                                                           |  | 2.36                                      |  | 2.85                                                                                    |  | July 14, 2013                                

---

The following table sets forth individual exercises of options by the following named executive officers during the financial year ended
December 31, 2003 and the financial year-end value of unexercised options:

|Name             |  | Securities Acquired on Exercise |  | Aggregate Value (CDN$) Realized |  | Unexercised Options at December 31, 2003
(#)
Exercisable/
Unexercisable |  | Value of Unexercised in-the-Money Options at
December 31, 2003
(CDN$)
Exercisable/
Unexercisable
|---------------- |  | ------------------------------- |  | ------------------------------- |  | ----------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------
|Martin Barkin(1) |  | 54,896                          |  | 264,598                         |  | 632,625/190,000                                                         |  | 769,815/88,200                                                                                  
|Dan Brazier(2)   |  | 3,406                           |  | 14,750                          |  | 6,667/143,333                                                           |  | 12,533/288,867                                                                                  
|Richard Flanagan |  | nil                             |  | nil                             |  | 60,000/70,000                                                           |  | 46,000/78,600                                                                                   
|Mark Oleksiw     |  | nil                             |  | nil                             |  | 6,667/113,333                                                           |  | 4,800/211,600                                                                                   
|John Durham      |  | nil                             |  | nil                             |  | nil/100,000                                                             |  | nil/202,000                                                                                     

---

70

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IntentionTo align further the interests of senior management with those of shareholders by increasing management shareholdings at minimal cost to the
Company.

MechanismEligible
participants in this plan are entitled to elect yearly to receive up to 20% of base salary and up to 100% of any bonus paid in respect of that year in
Deferred Share Units in lieu of cash compensation. An election must be made by December 1 of each year in respect of base salary and bonus for the next year. The elected amount is converted to
a number of Deferred Share
Units equal to the elected amount divided by the closing price of the common shares on the Toronto Stock Exchange or The NASDAQ National Market System on December 31 of each year in which the
election is made, based on a purchase commitment 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 designated by the Human Resources and Compensation Committee.

Redemption
of Deferred Share UnitsParticipants are not entitled to receive any Deferred Share Units until cessation of employment with the Company for any reason. The value
of each Deferred Share Unit, redeemable by the participant, will be equivalent to the market value of a common share at the time of redemption. The Deferred Share Units must be redeemed no later than
the end of the first calendar year commencing after the date of cessation of employment.

Named
Executive Officer Elections for 2002, 2003 and 2004The following table summarizes the elections under this plan by named executive officers:

|              |  | DSU Elections
|------------- |  | -------------
|
|
|
|Martin Barkin |  | 20           

---

As
at April 16, 2004, Dr. Barkin had a total of 186,560 Deferred Share Units, and the value of his interest in this plan at said date was CDN$1,119,360.

Employee Group Registered Retirement Savings Plan

IntentionTo provide a cost-sharing program for employees of the Company and its subsidiaries by way of a corporate sponsored registered
retirement savings plan ("RRSP") matching mechanism for employee retirement.

MechanismCommencing
12 months after continuous employment, employees of the Company and its subsidiaries are entitled to receive a discretionary payment from the
Company which matches employee contributions on a dollar-for-dollar basis toward an employee's RRSP, up to a maximum of 5% of the employee's eligible income ("normal" straight
time annual earnings or salary, not to include overtime payments, bonus or any other form of exceptional payment). The corporate contribution to this plan remains under the ownership and control of
the employee and is not subject to any lock-in provisions. The plan is administered by a committee composed of employees and management. Subject

71

---



to
the investment choices approved by the committee, employees control the investment of the contributions of both the employees and the Company.

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

Commencement
DateThe plan commenced on January 1, 2002, but employee matching contributions are not required for 2002, 2003 and 2004.

Subsidiary Long-Term Incentive Plans



IntentionTo align further the interests of senior management of the Company's wholly-owned subsidiary, DRAXIMAGE, for increasing the value of the
subsidiary 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 make payments to plan participants in the form of cash
and/or the Company's common shares, at the Company's option, based on increases in the fair market value of DRAXIMAGE's equity in excess of the Company's acquisition cost.

ParticipantsSelected
members of senior management of DRAXIMAGE as designated by the Company. Dr. Richard Flanagan participates in this plan but received no award
under the plan in 2003. Dr. Flanagan did receive a partial payout in accordance with the provisions of this plan in December 2003. See Note 8 in "Executive
CompensationSummary Compensation Table."



IntentionIn September 2003, the existing Equity Participation Plan of Draxis Pharma Inc. was terminated and replaced with a Long Term
Equity Incentive Plan to provide management employees of the Company's subsidiary, Draxis Pharma Inc. ("DPI") with a meaningful incentive to increase the value of the Company and to allow
management to share in the benefits of that value creation.

MechanismThe terms of this plan provide that eligible participants have a right to receive phantom equity shares of DPI and,
subject to approval by the Company's Board of Directors and applicable regulatory authorities, options of the Company. A participant may only receive the cash value of said options and phantom equity
shares on the plan expiry date or other designated termination event. In order for an eligible participant to receive a termination distribution amount with respect to a phantom equity share or an
option awarded to said participant certain financial ratios must be met by DPI.

ParticipantsSelected
members of senior management of DPI as designated by the Company. Mr. John Durham participates in this plan. In September 2003,
Mr. Durham was awarded phantom equity shares under this plan representing 2% of the outstanding common shares of Draxis Pharma Inc. at that date.

Discontinued Plans

In late 2002, the Board of Directors undertook a comprehensive review of the Company's various incentive plans in the context of current best practices and the
requirements of the Sarbanes-Oxley Act of 2002.

As
a result of this review, the Board of Directors decided to discontinue certain incentive plans of the Company effective December 4, 2002, subject to appropriate grandfathering
provisions related to outstanding plan participation. There was no participation in these plans in 2003.

72

---



The
details of these plans are listed below.



The
following table sets forth the 2003 financial year-end value of the named executive officers' unconverted Participation Shares, on an aggregated basis:

|              |  | Unconverted Participation
Shares(1)(2)
at December 31, 2003 |  | Value of Unconverted
in-the-Money
Participation Shares
at December 31, 2003
(CDN$)
|------------- |  | ----------------------------------------------------------- |  | ----------------------------------------------------------------------------------
|
|Martin Barkin |  | 245,000                                                     |  | nil                                                                               

---

See
also "Item 10: Material Contracts."

73

---



Compensation of Directors

The compensation paid to each independent director of the Company is an annual retainer of CDN$12,500 plus a meeting fee of CDN$1,500 for each Board of Directors
and committee meeting attended, some via teleconference. In addition, the Chairs of each of the committees receive an annual retainer of CDN$1,500. Directors who are employees of the Company do not
receive any compensation in their capacity as directors. For the year ended December 31, 2003, Mr. Brian King received CDN$60,000 as non-executive Chairman of the Board of
Directors. He did not otherwise receive meeting fees as a director. In December 2001, under the Company's Stock Option Plan, each of the directors (excluding the President and Chief Executive
Officer) was awarded 15,000 options as partial compensation for services rendered as directors. The Chairman was awarded an additional 5,000 options. It is contemplated that an award of the same
number of options will occur annually on each January 1 with an exercise price based on the average price of the common shares on the TSX for the five trading days immediately preceding
January 1 in each year.

From
time to time, special committees of the Board of Directors are appointed to consider special issues, in particular issues which could potentially involve related party transactions
and the adequacy and form of the compensation of Directors. Compensation for work on such committees is set based on the amount of work involved.

Minimum Shareholding Requirements

In June 2001, the Board of Directors established a corporate policy requiring each current Director to acquire by June 2004 (or in the case of
future Board of Directors members, within three years of their appointment) common shares in the Company equal to five times his or her annual honorarium. Compliance with this policy will be monitored
annually by the Nominating and Corporate Governance Committee.

Director
shareholdings as of March 31, 2004

Director

Shares Owned

% Owned of total issued and
outstanding common sharesMartin Barkin

603,744
(1)
1.6Leslie Dan

18,356

<1George Darnell

26,000

<1Rolf H. Henel

30,000

<1Brian King

95,750

<1Sam Sarick

785,992

2.1Stewart Saxe

104,485

<1Bruce W. Simpson

10,000

<1John Vivash

15,000

<1Total

1,689,327

4.5%


---

74

---



Senior
Management shareholdings as of March 31, 2004

Senior Management

Shares Owned

% Owned of total issued and
outstanding common sharesMartin Barkin

603,744

1.6Dan Brazier

4,355

<1Jack A. Carter

nil

nilJohn Durham

nil

nilRichard Flanagan

18,294

<1Alida Gualtieri

500

<1Chien Huang

6,000

<1Mark Oleksiw

nil

nilJerry Ormiston

4,100

<1Total

33,249
(1)
<1


---

75

---



Director outstanding options as of April 30, 2004

|Director          |  | # of Options                                     |  | Exercise Price                                               |  | Expiration Date                                                                                                           
|----------------- |  | ------------------------------------------------ |  | ------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------
|Martin Barkin     |  | 33,750
33,750
400,000
10,125
120,000
225,000     |  | US$1.48
US$1.85
CDN$3.07
US$3.02
CDN$3.60
CDN$4.00           |  | May 20, 2004
September 20, 2004
April 18, 2005
June 13, 2006
July 5, 2006
February 5, 2007                                
|Leslie L. Dan     |  | 10,000
10,000
15,000
15,000
15,000               |  | CDN$1.63
CDN$2.91
CDN$4.19
CDN$2.33
CDN$4.30                 |  | December 31, 2004
December 31, 2005
December 31, 2006
December 31, 2007
December 31, 2008                                 
|George M. Darnell |  | 10,000
33,750
10,000
10,125
15,000
15,000
15,000 |  | CDN$1.63
US$1.76
CDN$2.91
US$3.02
CDN$4.19
CDN$2.33
CDN$4.30 |  | December 31, 2004
June 13, 2005
December 31, 2005
June 13, 2006
December 31, 2006
December 31, 2007
December 31, 2008     
|Rolf H. Henel     |  | 10,000
5,000
15,000
15,000                       |  | CDN$5.12
CDN$3.66
CDN$2.33
CDN$4.30                          |  | April 30, 2007
August 13, 2007
December 31, 2007
December 31, 2008                                                        
|Brian M. King     |  | 15,000
15,000
20,000
20,000
20,000               |  | CDN$1.63
CDN$2.91
CDN$4.19
CDN$2.33
CDN$4.30                 |  | December 31, 2004
December 31, 2005
December 31, 2006
December 31, 2007
December 31, 2008                                 
|Samuel Sarick     |  | 10,000
10,000
10,125
15,000
15,000
15,000        |  | CDN$1.63
CDN$2.91
US$3.02
CDN$4.19
CDN$2.33
CDN$4.30         |  | December 31, 2004
December 31, 2005
June 13, 2006
December 31, 2006
December 31, 2007
December 31, 2008                   
|Stewart D. Saxe   |  | 33,750
10,000
10,000
10,125
15,000
15,000
15,000 |  | US$1.85
CDN$1.63
CDN$2.91
US$3.02
CDN$4.19
CDN$2.33
CDN$4.30 |  | September 20, 2004
December 31, 2004
December 31, 2005
June 13, 2006
December 31, 2006
December 31, 2007
December 31, 2008
|Bruce W. Simpson  |  | 10,000
5,000
15,000
15,000                       |  | CDN$5.12
CDN$3.66
CDN$2.33
CDN$4.30                          |  | April 30, 2007
August 13, 2007
December 31, 2007
December 31, 2008                                                        
|John A. Vivash    |  | 10,000
15,000
15,000
15,000                      |  | CDN$2.91
CDN$4.19
CDN$2.33
CDN$4.30                          |  | December 31, 2005
December 31, 2006
December 31, 2007
December 31, 2008                                                   
|                  |  |                                                  |  |                                                              |  |                                                                                                                           
|Total             |  | 1,415,500                                        |  |                                                              |  |                                                                                                                           
|                  |  |                                                  |  |                                                              |  |                                                                                                                           

76

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Senior
Management outstanding options as of April 30, 2004

|Senior Management |  | # of Options                                 |  | Exercise Price                                     |  | Expiration Date                                                                           
|----------------- |  | -------------------------------------------- |  | -------------------------------------------------- |  | ------------------------------------------------------------------------------------------
|Martin Barkin     |  | 33,750
33,750
400,000
10,125
120,000
225,000 |  | US$1.48
US$1.85
CDN$3.07
US$3.02
CDN$3.60
CDN$4.00 |  | May 20, 2004
September 20, 2004
April 18, 2005
June 13, 2006
July 5, 2006
February 5, 2007
|Dan Brazier       |  | 20,000
30,000
100,000                        |  | CDN$2.50
CDN$2.32
CDN$2.36                         |  | October 31, 2007
December 31, 2007
July 14, 2013                                          
|Jack A. Carter    |  | 18,334
6,667
13,334                          |  | CDN$3.60
CDN$3.66
CDN$2.32                         |  | July 5, 2006
August 13, 2007
December 31, 2007                                            
|John Durham       |  | 100,000                                      |  | CDN$2.36                                           |  | July 14, 2013                                                                             
|Richard Flanagan  |  | 70,000
40,000
20,000                         |  | CDN$3.60
CDN$3.66
CDN$2.32                         |  | July 5, 2006
August 13, 2007
December 31, 2007                                            
|Alida Gualtieri   |  | 25,000                                       |  | CDN$3.25                                           |  | November 3, 2008                                                                          
|Chien Huang       |  | 3,333
10,000
50,000                          |  | CDN$3.15
CDN$5.41
CDN$2.36                         |  | June 19, 2006
May 14, 2007
July 14, 2013                                                  
|Mark Oleksiw      |  | 13,333
100,000                               |  | CDN$3.66
CDN$2.36                                  |  | August 13, 2007
July 14, 2013                                                             
|Jerry Ormiston    |  | 8,333
46,667
25,000
10,000
15,000            |  | CDN$3.00
CDN$3.15
CDN$3.60
CDN$3.66
CDN$2.32       |  | May 29, 2006
June 19, 2006
July 5, 2006
August 13, 2007
December 31, 2007                 
|                  |  |                                              |  |                                                    |  |                                                                                           
|Total             |  | 725,001                                      |  |                                                    |  |                                                                                           
|                  |  |                                              |  |                                                    |  |                                                                                           

---

Board Practices

Statement of Corporate Governance Practices

The Board of Directors of the Company believes that sound corporate governance practices are essential to the well-being of the Company and its
shareholders, and that these practices should be reviewed regularly to ensure that they are appropriate. The Board of Directors has carefully considered and reviewed the series of guidelines for
effective corporate governance issued by The Toronto Stock Exchange ("TSX Guidelines"), the corporate governance requirements of the U.S. Sarbanes-Oxley Act of 2002, and the reforms of corporate
governance listing standards of the NASDAQ. The Board of Directors believes that the Company's corporate governance practices are well-aligned with the recommendations contained in these
various guidelines and regulations. The Board of Directors is also

77

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reviewing
the proposed corporate governance reforms contained in Multilateral Policy MP 58-201 entitled "Effective Corporate Governance" recently proposed by Canadian securities
regulators.

Mandate of the Board of Directors

The mandate of the Board of Directors is to supervise the management of the 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, strategic direction and organizational structure, where required, and involves itself jointly with
management in ensuring the creation of shareholder value and the serving the best interests of the Company. In April 2004, the Board of Directors adopted a detailed charter. The charter is
available on the Company's Web site atwww.draxis.com. The charter specifies that the Board of Directors is responsible for:



There
are five regularly scheduled Board of Directors meetings per year. However, the Board of Directors also meets as frequently as the need arises to consider major issues and
opportunities.

There
were eleven meetings of the Board of Directors in 2003.

Board of Directors Composition

The Board of Directors has reviewed the composition of the Board to determine which of the directors may be considered "unrelated" within the meaning of that term
as set out in the TSX Guidelines. A director who is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the
director's ability to act with a view to the best interests of the Company, other than interests arising from shareholdings, is considered to be an unrelated director.

The
Board of Directors, currently composed of nine members, has considered the relationship of each of the directors to the Company and has determined that eight of the nine directors
are unrelated to the Company. Dr. Martin Barkin, the President and Chief Executive Officer of the Company, is considered to be a related director since he is an employee of the Company.

The
Board of Directors believes that Dr. Barkin is sensitive to conflicts of interest and excuses himself from deliberations and voting in appropriate circumstances. He brings a
skill set and knowledge

78

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base
that is beneficial to the Company and his participation as a director contributes to the effectiveness of the Board of Directors.

The
Board of Directors has adopted a practice that the Chair of the Board and the CEO of the Company are separate individuals.

The
Board of Directors sets aside during its regularly scheduled meetings a time for meeting without any management present (including the CEO).

Committees of the Board of Directors

The Board of Directors has three standing committees: the Audit Committee, the Human Resources and Compensation Committee and the Nominating and Corporate
Governance Committee. To maintain appropriate independence, no members of management sit on any of the three standing committees.

From
time to time, special committees of the Board of Directors are appointed to consider special issues, in particular, any issues which could potentially involve related party
transactions.

Committees
of the Board of Directors and individual Board members may engage independent consultants and outside advisors at the expense of the Company, where reasonable and appropriate,
to assist them in discharging their responsibilities.



The Audit Committee is responsible for reviewing the Company's financial reporting procedures and internal controls. The Committee is also responsible for
reviewing quarterly financial statements and the annual financial statements and earnings announcements prior to their approval by the full Board of Directors and communicating regularly with the
Company's external auditors.

The
Company believes the oversight responsibility of the Committee provides a key stewardship role for the Committee in the Company's financial disclosure issues, internal controls, risk
management, corporate finance and related matters.

In
reviewing the audited financial statements of the Company, the Committee discusses the quality, not just the acceptability, of the accounting principles, the reasonableness of
significant judgments, and the clarity of disclosure in the financial statements. In addition, the Committee discusses with the Company's independent auditors the overall scope and plans for their
audit. The Committee meets with the external auditors, with and without management present, to discuss the results of their examination and the overall quality of the Company's financial reporting.
The Committee also carefully reviews evolving Canadian and U.S. audit committee regulations and best practices to ensure corporate alignment with the spirit and intent of such practices.

In
April 2004, the Board of Directors approved amendments to the Charter for the Audit Committee, which was approved in February 2003. The charter is available on the
Company's Web site atwww.draxis.com. The charter specifies the purpose of the Committee is to assist the Board of Directors with its oversight
responsibilities by:



79

---





The
Committee is composed of four directors, all of whom are unrelated directors and all of whom are financially literate. The current members of the Audit Committee are
Messrs. Samuel Sarick (Chair), Leslie Dan, George Darnell and Rolf Henel. Mr. Henel is the Company's designated financial expert in accordance with applicable regulatory and legislative
requirements.



The Human Resources and Compensation Committee oversees overall corporate policy with respect to compensation and benefits and makes recommendations to the Board
of Directors on, among other things, the compensation of senior management. In assessing compensation issues, the Committee reviews and examines in detail the performance of senior management.

Each
of the four members of the Committee is an unrelated director. The current members of the Human Resources and Compensation Committee are Messrs. Brian King (Chair), Stewart
Saxe, Bruce Simpson and John Vivash.

In
April 2004, the Board of Directors approved a detailed charter for the Human Resources and Compensation Committee. The charter is available on the Company's Web site at www.draxis.com. The charter
specifies the purpose of the committee is to assist the Board of Directors with its oversight responsibilities by reviewing
and reporting on:



80

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

Each
of the four members of the Committee is an unrelated director. The current members of the Nominating and Corporate Governance Committee are Messrs. John Vivash (Chair),
George Darnell, Rolf Henel and Bruce Simpson.

In
April 2004, the Board of Directors approved a detailed Charter for the Nominating and Corporate Governance Committee. The charter is available on the Company's Web site at www.draxis.com. The
charter specifies that the purpose of the committee is to assist the Board of Directors with its oversight responsibilities by:



81

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Decisions Requiring Board of Directors Approval

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



Orientation of New Directors

In orienting new members to the Board of Directors, members are provided with an opportunity to visit the Company's facilities and to meet with management and
other members of the Board of Directors to discuss and understand the business. In addition, detailed documentation is provided relating to the current business plan and current policies of the
Company.

Board of Directors Performance

The Board of Directors regularly discusses the effectiveness of its meetings and decision-making processes by considering and assessing from time to time the
performance of the Board of Directors relating to its effectiveness, size, compensation policies and the assessment of management performance.

CEO Performance

On an annual basis, the Company's President and CEO circulates a proposed strategic plan which is discussed and, if appropriate, adopted by the Board of
Directors. This strategic plan forms the basis of the corporate objectives which the CEO is responsible for meeting. The Human Resources and Compensation Committee of the Board of Directors assesses
the CEO's performance and recommends to the Board of Directors as a whole, his compensation. Specifically, the Human Resources and Compensation Committee's assessment of the CEO's performance
considers matters such as the development of appropriate strategic direction and action plans for the Company, meeting key
objectives, identification of significant issues and challenges facing the Company and the development of appropriate solutions to address such issues and challenges.

Shareholder Feedback and Communication

The Company maintains an investor relations department headed by an Executive Director, Investor Relations, which reports directly to the President and CEO of the
Company. In addition, investor relations experts are retained from time to time by the Company to advise on issues and best practices for investor relations. The Company communicates regularly with
its shareholders through annual and quarterly reports. At the Company's annual general meeting of shareholders, a full opportunity is afforded for shareholders to ask questions concerning the
Company's business. Each shareholder and investor inquiry receives a prompt response from the investor relations department or an appropriate officer of the Company. Information about the Company,
including annual reports, interim financial reports and recent news releases, are also available on the Company's Internet website at www.draxis.com. In addition, the Company provides the opportunity
for investors in both Canada and the U.S. to pose questions to senior management, including the CEO, the Chief Financial Officer

82

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and
the Executive Director, Investor Relations through public forums such as conference calls and webcasts.

Board Expectations of Management

Management is responsible for the day-to-day operations of the Company and is expected to implement the approved strategic business plan
within the context of authorized budgets and corporate policies and procedures. The information that management provides to the Board of Directors is critical. Management is expected to report
regularly to the Board of Directors in a comprehensive, accurate and timely fashion on the business and affairs of the Company. The Board of Directors monitors the nature of the information requested
by and provided to it so that it can effectively identify issues and opportunities for the Company.

Employees

As at December 31, 2003, the Company and its subsidiaries employed a total of 378 employees. DPI is the largest employer with 284 employees, all located in
Montréal, Québec. DRAXIMAGE employs 81 people all in Montréal, Québec. The Company itself employs 13 people, the majority of whom are
located in the Province of Ontario. At December 31, 2002 and 2001, the Company and its subsidiaries had 315 and 313 employees, respectively.

Item 7. Major Shareholders and Related Party Transactions

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

To
our knowledge, the following are the only persons who, as at March 31, 2004, beneficially own, directly or indirectly, or exercise control over our common shares carrying more
than five percent (5%) of the votes attached to all of those shares.

|Identity of Person or Group       |  | Amount Owned |  | Percent of Class |  
|--------------------------------- |  | ------------ |  | ---------------- | -
|Natcan Investment Management Inc. |  | 4,393,667    |  | 10.7             | %
|Neil Gagnon                       |  | 2,826,930    |  | 7.6              | %

As
of April 16, 2004, 18,025,642 common shares (47.7% of the outstanding common shares) were held of record by 554 shareholders whose registered addresses were in the United
States. The Company has no knowledge of any other shares held beneficially in the United States.

As
of April 16, 2004, there were a total of 1,131 shareholders of record holding 37,760,307 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 the Company's head office premises at 6870 Goreway Drive in Mississauga, Ontario is owned 50% by Samuel Sarick Limited, a corporation wholly owned by
Mr. Sarick, a director of the Company. The original lease for the premises was entered into on April 25, 1994 between Samuel Sarick Limited, Kentlake Construction Limited and Anec
Investments Limited, as landlord, and the Company, as tenant. The lease renewal was negotiated between the Company and Samuel Sarick Limited on an arm's-length basis with the assistance of Colliers
International retained by the Company
and was renewed with Board approval effective May 1, 1999 for a period of five years. The Company believes that the lease terms are consistent with arm's-length comparables and that the annual
rent payable of CDN$187,736 is at fair market value. The Company is presently renegotiating the terms of the lease, as it expired on April 30, 2004.

The
Company has made loans to certain key management personnel in connection with its incentive plans and as inducements to enter into employment agreements. These plans have been

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discontinued,
and there will be no further indebtedness under said plans. Details of loans currently outstanding are set forth in the table below.

|                                                                                |  |        |  | Largest Amount Outstanding During 2003 Fiscal Year(1) |  | Amount Outstanding as at March 31, 2004(1) |  |         |  |       
|------------------------------------------------------------------------------- |  | ------ |  | ----------------------------------------------------- |  | ------------------------------------------ |  | ------- |  | ------
|
|Martin Barkin, MD
President &
Chief Executive Officer                           |  | Lender |  | 100,000                                               |  | 175,769                                    |  | 100,000 |  | 17,710
|Dan Brazier
Senior Vice-President, Corporate Development and Strategic Planning |  | Lender |  | nil                                                   |  | 37,247                                     |  | nil     |  | nil   
|Richard Flanagan
President, DRAXIMAGE                                           |  | Lender |  | 30,000                                                |  | 20,076                                     |  | 30,000  |  | 6,556 
|Mark Oleksiw
Chief Financial Officer                                            |  | Lender |  | nil                                                   |  | nil                                        |  | nil     |  | nil   
|John Durham
President, Draxis Pharma Inc.                                       |  | Lender |  | nil                                                   |  | nil                                        |  | nil     |  | nil   

---



Item 8. Financial Information

The Company's Consolidated Financial Statements are attached as pages F-1 through F-29. There have been no significant changes since the
date of the financial statements.

Legal/Arbitration Proceedings

From time to time, the Company becomes involved in legal proceedings and claims which arise in the ordinary course of business. With the exception of the matter
described below related toAnipryl®, the Company considers that the ultimate liability with respect to any known actions will not materially
affect the business, financial position, results of operations or cash flows of the Company.

In
1998, a Canadian legal proceeding was launched against the Company and DAHI by a former consultant, Jozsef Knoll, claiming royalty entitlements based on the net profit from sales of Anipryl®. Total
damages claimed are $100 million. The plaintiff also claims entitlement to certain shares of DAHI. The plaintiff has
taken no steps in the last four years to move the claim forward and may not do so. The Company believes that it has good defenses to this claim and that it is without merit and has and will continue
to vigorously defend itself.

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From
2000 until November 2003, the Company and DAHI were involved in U.S. and Canadian legal proceedings with the University of Toronto and the University of Toronto Innovations
Foundation. One dispute related to the terms of a 1992 license agreement under which Innovations Foundation claimed entitlement to a portion of the consideration earned by DAHI with respect to Anipryl®. The second dispute related to a 1988 contract research agreement under which the University of Toronto claimed a declaration of
ownership and an order for assignment of patents and damages related to certainAnipryl®-related intellectual property. In
November 2003, the University of Toronto and the University of Toronto Innovations Foundation dismissed these lawsuits without payment by the Company or DAHI.

Item 9. The Offer and Listing

The Company's common shares are listed on The Toronto Stock Exchange (the "TSX") under the symbol "DAX." The following table sets forth, in Canadian dollars, the
per share high and low sales prices on the TSX for the five most recent full financial years:

Years

High

Low1999

4.57

1.412000

5.95

2.052001

4.40

2.112002

5.60

2.002003

4.75

1.61


The
following table sets forth, in Canadian dollars, the per share high and low sales prices on the TSX by fiscal quarter for 2003 and 2002.

2003

High

LowFirst Quarter

2.50

1.61Second Quarter

2.50

1.72Third Quarter

3.07

2.15Fourth Quarter

4.75

2.41


2002

High

LowFirst Quarter

4.98

3.60Second Quarter

5.68

3.75Third Quarter

4.15

2.51Fourth Quarter

3.00

2.00


The
following table sets forth, in Canadian dollars, the per share high and low sales prices on the TSX for the most recent six months:

Last 6 months

High

LowNovember 2003

4.75

3.10December 2003

4.40

3.25January 2004

5.49

3.18February 2004

4.86

3.81March 2004

7.90

5.35April 2004

7.03

4.78


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The
common shares are quoted on the NASDAQ National Market System ("NASDAQ") in the United States under the symbol "DRAX." The following table sets forth, in U.S. dollars, the per share
high bid and low asked prices on NASDAQ for the five most recent full financial years:

Years

High

Low1999

3.12

0.972000

4.62

1.032001

2.79

1.452002

3.67

1.292003

3.70

1.09


The
following table sets forth, in U.S. dollars, the per share high and low asked prices on NASDAQ in U.S. dollars, by fiscal quarter for 2003 and 2002:

2003

High

LowFirst Quarter

1.66

1.09Second Quarter

1.85

1.18Third Quarter

2.23

1.55Fourth Quarter

3.70

1.80


2002

High

LowFirst Quarter

3.14

2.22Second Quarter

3.67

2.45Third Quarter

2.72

1.59Fourth Quarter

1.90

1.29


The
following table sets forth, in U.S. dollars, the per share high and low sales prices on NASDAQ for the most recent six months:

Last 6 months

High

LowNovember 2003

3.70

2.27December 2003

3.50

2.45January 2004

5.49

3.18February 2004

4.05

3.81March 2004

5.94

4.06April 2004

5.36

3.46


Item 10. Additional Information

Bylaws and Articles of Amalgamation

The Company's Articles of Amalgamation are on file with the Corporations Directorate of Industry Canada under Corporation Number 357288-9. The
Articles of Amalgamation do not include a stated purpose and do not place any restrictions on the business that the Company may carry on.

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Directors

The minimum number of directors of the Company is one (1) and the maximum number is twelve (12). In accordance with the Company's bylaws and the Canada
Business Corporations Act (the "Act"), a majority of its directors must be residents of Canada. In order to serve as a director, a person must be a natural person at least 18 years of age, of
sound mind and not bankrupt. Neither the Articles of Amalgamation, bylaws, nor the Act, impose any mandatory retirement requirements for directors.

Under
the Company's bylaws and the Articles of Amalgamation, a director of the Company need not be a shareholder. However, in June 2001 the Board of Directors established a
corporate policy requiring each current Director to acquire by June 2004 (or in the case of future Board of Directors members, within three years of their appointment) common shares in the
Company equal to five times his or her annual honorarium. Compliance with this policy will be monitored annually by the Nominating and Corporate Governance Committee.

A
director who is a party to, or who is a director or officer of, or has a material interest in, any person who is a party to a material contract or transaction or proposed material
contract or transaction with the Company must disclose to the Company the nature and extent of his or her interest at the time and in the manner provided by the Act. The Act prohibits such a director
from voting on any resolution to approve the contract or transaction unless the contract or transaction:



The
Board of Directors may, on behalf of the Company and without authorization of its shareholders:



The
Act prohibits the giving of a guarantee to any shareholder, director, officer or employee of the Company or of an affiliated corporation or to an associate of any such person for any
purpose or to any person for the purpose of or in connection with a purchase of a share issued or to be issued by the Company or its affiliates, where there are reasonable grounds for believing that
the Company is or, after giving the guarantee, would be unable to pay its liabilities as they become due, or the realizable value of the Company's assets in the form of assets pledged or encumbered to
secure a guarantee, after giving the guarantee, would be less than the aggregate of the Company's liabilities and stated capital of all classes.

These
borrowing powers may be varied by the Company's bylaws or its Articles of Amalgamation. However, the Company's bylaws and Articles of Amalgamation do not contain any restrictions
on or variations of these borrowing powers.

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Share Capitalization

The Company's Articles of Amalgamation authorize the issuance of an unlimited number of common shares (37,760,307 of which are outstanding as of April 16,
2004), an unlimited number of preferred shares (none of which are issued and outstanding), and 2,000,000 Employee Participation Shares (2,000,000 of which have been issued and none of which remain
outstanding as of April 16, 2004). The Articles of Amalgamation do not authorize the issuance of any other class of shares.

Common Shares

The holders of the common shares of the Company are entitled to receive notice of and to attend all meetings of the shareholders of the Company and have one vote
for each common share held at all meetings of shareholders. The directors are elected at each annual meeting of shareholders and do not stand for re-election at staggered intervals.

The
holders of common shares are entitled to receive dividends and the Company will pay dividends, as and when declared by the Board of Directors, out of moneys properly applicable to
the payment of dividends, in such amount and in such form as the Board of Directors may from time to time determine, subject to the rights of the holders of any other class of shares of the Company
entitled to receive dividends in priority to or ratably with the holders of the common shares, and all dividends which the Board of Directors may declare on the common shares shall be declared and
paid 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, or any other distribution of assets of the Company among its
shareholders for the purpose of winding-up its affairs, the holders of the common shares shall, subject to the rights of the holders of any other class or shares of the Company entitled to
receive the assets of the Company upon such distribution in priority to or ratably with the holders of the common shares, be entitled to participate ratably in any distribution of the assets of the
Company.

Preferred Shares

The preferred shares of the Company may at any time or from time to time be issued in one or more series. No preferred shares of the Company have been issued to
date. Preferred shares shall be entitled to preference over the common shares and any other shares of the Company ranking junior to the preferred shares and the distribution of assets in the event of
any liquidation and common dissolution
or winding-up of the Company, whether voluntary or involuntary, or other distribution of the assets of the Company among its shareholders for the purpose of winding-up its
affairs. The preferred shares of each series shall rank in parity with the preferred shares of every other series with respect to priority in the payment of dividends and in the distribution of assets
in the event of liquidation, dissolution or winding-up of the Company.

Subject
to the provisions relating to any particular series, the Company may redeem the whole or any part of the preferred shares on any one or more series outstanding from time to time
at such price or prices as may be applicable to such series by giving at least thirty (30) days' prior notice in writing of the intention of the Company to redeem such shares to each person who
at the date of giving such notice is the registered holder of preferred shares to be redeemed.

Employee Participation Shares

On February 16, 1995, the Board of Directors of the Company authorized the issuance of 975,000 Series A Participation Shares; on December 18,
1995, the Board of Directors of the Company authorized the issuance of 555,000 Series B Participation Shares and on May 12, 1999, the Board of Directors of the Company authorized the
issuance of 470,000 Series C Participation Shares. The

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Employee
Participation Share Purchase Plan (the "EP Plan") was discontinued effective December 4, 2002.

Each
participation share entitles the holder to receive cash dividends, if any, as may from time to time be declared payable thereon, at the same time as dividends, if any, are paid on
the common shares of the Company, in an amount for each participation share of a particular series which is equal to the proportion of the amount of the dividend declared on each common share that the
subscription price of such participation share is of the fair market value at the date of issuance of such participation share.

In
the event of a proposal, order or resolution for the liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary; or on the "Automatic
Conversion Date" (as defined in the Articles of Amalgamation and the terms of the EP Plan); or at the option of the holder on a "Conversion Date" (as defined in the Articles of Amalgamation and the
terms of the EP Plan) other than the "Automatic Conversion Date" (as defined in the Articles of Amalgamation and the terms of the EP Plan), the participation shares will become common shares, and the
number of common shares a holder receives on conversion is the number of common shares which is determined by multiplying the number of participation shares held, or in the case of
conversion on a Conversion Date other than the Automatic Conversion Date, the number of participation shares which the holder elects to convert, by a fraction:



Shareholder Rights Plan

On May 16, 2002, the shareholders of the Company approved a Shareholder Rights Plan Agreement (the "Rights Plan"), the principal terms of which are as
follows:



The Rights Plan became effective on April 23, 2002 (the "Effective Date") and was approved by shareholders of the Company at its Annual and Special Meeting
of shareholders held on May 16, 2002.



The term of the Rights Plan is ten years, subject to reconfirmation by shareholders at every third annual meeting.



One right (a "Right") attaches to each outstanding common share.



The Rights will separate from the 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 person having acquired, or the commencement, announcement or other date determined by the Board of Directors in respect

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of
a takeover bid to acquire, 20% or more of the common shares, other than by an acquisition pursuant to a takeover bid permitted by the Rights Plan (a "Permitted Bid").

The
acquisition of Beneficial Ownership (as defined in the Rights Plan) by any person (an "Acquiring Person"), including others acting in concert, of 20% or more of the common shares,
other than by way of a Permitted Bid, is referred to as a "Flip-in Event." Under the Rights Plan, there are certain exceptions to that rule, including (i) the Company or a
subsidiary of the Company, (ii) a person who acquires 20% or more of the outstanding common shares through, among other things, a share redemption or a Permitted Bid, (iii) an
underwriter or selling group member during the course of a public distribution; or (iv) investment and fund managers, trust companies and other persons who are managing investment funds,
pension funds or plans, estates or accounts on behalf of another person, provided they are not making, or are not part of a group making, a takeover bid. Any Rights held by an Acquiring Person on or
after the earlier of the Separation Time or the first date of public announcement by the Company or an Acquiring Person that an Acquiring Person has become such will become void upon the occurrence of
a Flip-in Event.

Under
the Rights Plan, a bidder is entitled to "lock up" any shareholder of the Company without triggering the Rights Plan so long as the lock-up agreement is a "soft" lock
up, meaning the locked-up shareholder is entitled to tender to a higher offer (so long as the higher offer is not required under the lock-up agreement to be more than 7% higher
than the first offer).

Ten
trading days after the occurrence of the Flip-in Event, the Rights (other than those held by the Acquiring Person) will permit the holder to purchase, for the exercise
price of the Rights,
common shares having a value based on the then-prevailing market price) equal to twice such exercise price (i.e., at a 50% discount). The exercise price of the Rights will be equal to five
times the prevailing market price at the Separation Time.

The
issue of the Rights is not initially dilutive. Upon a Flip-in Event occurring and the Rights separating from the attached shares, reported earnings per common share on a
fully diluted or non-diluted basis may be affected. Holders of Rights who do not exercise their Rights upon the occurrence of a Flip-in Event may suffer substantial dilution.



Prior to the Separation Time, the Rights will be evidenced by a legend imprinted on certificates for common shares issued from and after the Effective Date.
Rights are also attached to such shares outstanding on the Effective Date, although share certificates issued prior to that date will not bear such a legend. Prior to the Separation Time, Rights will
not be transferable separately from the attached shares. From and after the Separation Time, the Rights will be evidenced by Rights certificates which will be transferable and traded separately from
the shares.



The requirements of a Permitted Bid include the following:



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The
Rights Plan allows a competing Permitted Bid (a "Competing Permitted Bid") to be made while a Permitted Bid is in existence. A Competing Permitted Bid must satisfy all the
requirements of a Permitted Bid except that it may expire on the same date as the Permitted Bid, subject to the requirement that it be outstanding for a minimum period of 35 days.



The Board of Directors may, prior to a Flip-in Event, waive the dilutive effects of the Rights Plan in respect of a particular Flip-in
Event (an "Exempt Acquisition") that would result from a takeover bid made by way of a takeover bid circular to all holders of common shares, provided that in such circumstances the Board shall be
deemed to have waived the application of the Rights Plan to any other Flip-in Event occurring as a result of a takeover bid made by way of a takeover bid circular to all holders of common
shares prior to the expiry of any takeover bid in respect of which the Rights Plan has been waived. The Board of Directors may also waive the Rights Plan in respect of a particular Flip-in
Event that has occurred through inadvertence, provided that the Acquiring Person that inadvertently triggered such Flip-in Event reduces its beneficial holdings to less than 20% of the
outstanding voting shares of the Company within 14 days or such other period as may be specified by the Board of Directors.



At any time prior to the occurrence of a Flip-in Event, the Board of Directors may with the prior approval of the holders of the common shares or the
Rights redeem all, but not less than all, of the outstanding Rights at a price of CDN$0.000001 each. Rights will be deemed to have been redeemed by the Board of Directors following completion of a
Permitted Bid, Competing Permitted Bid or Exempt Acquisition.



The Company is authorized to make amendments to the Rights Plan to correct any clerical or typographical error 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 or regulation. Other amendments or supplements to the Rights Plan may be made with the prior
approval of shareholders or Rights holders.

Action Necessary to Change Rights of Shareholders

In order to change the rights of our shareholders, the Company would need to amend its Articles of Amalgamation to effect the change. Such an amendment would
require the approval of holders of two-thirds of the common shares cast at a duly called special meeting. For certain amendments such as those creating of a class of preferred shares, a
shareholder is entitled under the Act to dissent in respect of such a resolution amending the Articles of Amalgamation and, if the resolution is adopted and the Company implements such changes, demand
payment of the fair value of its common shares.

Meeting of Shareholders

An annual meeting of shareholders is held each year for the purpose of considering the financial statements and reports, electing directors, appointing auditors
and for the transaction of other business as may be brought before the meeting. The Board of Directors has the power to call a special meeting of shareholders at any time.

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Notice
of the time and place of each meeting of shareholders must be given not less than 21 days, nor more than 50 days, before the date of each meeting to each director,
to the auditor and to each shareholder who at the close of business on the record date for notice is entered in the securities register as the holder of one or more shares carrying the right to vote
at the meeting. Notice of meeting of shareholders called for any other purpose other than consideration of the minutes of an earlier meeting, financial statements and auditor's report, election of
directors and reappointment of the incumbent auditor, must state the nature of the business in sufficient detail to permit the shareholder to form a reasoned judgment on and must state the text
of any special resolution or bylaw to be submitted to the meeting.

The
only persons entitled to be present at a meeting of shareholders are those entitled to vote, the directors of the Company and the auditor of the Company. Any other person may be
admitted only on the invitation of the chairman of the meeting or with the consent of the meeting. In circumstances where a court orders a meeting of shareholders, the court may direct how the meeting
may be held, including who may attend the meeting.

Limitations on Right to Own Securities

Neither Canadian law nor the Company's Articles of Amalgamation or bylaws limit the right of a non-resident to hold or vote common shares of the
Company, other than as provided in the Investment Canada Act (the "Investment Act"). The Investment Act generally prohibits implementation of a direct reviewable investment by an individual,
government or agency thereof, corporation, partnership, trust or joint venture that is not a "Canadian," as defined in the Investment Act (a "non-Canadian"), unless, after review, the
minister responsible for the Investment Act is satisfied or is deemed to be satisfied that the investment is likely to be of net benefit to Canada. An investment in the common shares of the Company by
a non-Canadian (other than a "WTO Investor," as defined below) would be reviewable under the Investment Act if it were an investment to acquire direct control of the Company, and the book
value of the assets of the Company were CDN$5.0 million or more (provided that immediately prior to the implementation of the investment the Company was not controlled by WTO Investors). An
investment in common shares of
the Company by a WTO Investor (or by a non-Canadian other than a WTO Investor if, immediately prior to the implementation of the investment, the Company was controlled by WTO Investors)
would be reviewable under the Investment Act if it were an investment to acquire direct control of the Company (in 2003) and the value of the assets of the Company equaled or exceeded
CDN$223.0 million. A non-Canadian, whether a WTO Investor or otherwise, would be deemed to acquire control of the Company for purposes of the Investment Act if he or she acquired a
majority of the common shares of the Company. The acquisition of less than a majority, but at least one-third of the shares, 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 by the acquirer through the ownership of the shares. In general, an individual is a WTO Investor if he or she is a
"national" of a country (other than Canada) that is a member of the World Trade Organization ("WTO Member") or has a right of permanent residence in a WTO Member. A corporation or other entity will be
a "WTO Investor" if it is a "WTO Investor-controlled entity," pursuant to detailed rules set out in the Investment Act. The United States is a WTO Member. Certain transactions involving the Company's
common shares would be exempt from the Investment Act, including:



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Material Contracts

On March 31, 2003, the Company amended its License, Distribution and Supply Agreement with Elan to return the Canadian rights for several of Elan's
unapproved neurology products from its DRAXIS Pharmaceutica division in exchange for a cash payment of $6.5 million. This amendment is Exhibit 4.5 to this annual report.

On
October 24, 2002, the Company entered into a First Amendment to the Subscription Agreement among the Company, DPI and SGF, which provided for additional share subscriptions by
the Company and SGF in three separate and equal tranches. On October 24, 2002, the Company and SGF subscribed for 748,319 common shares and 362,792 common shares, respectively, in the capital
of DPI at a subscription price of CDN$1.50 per share. The aggregate subscription price was CDN$1,666,667. On December 31, 2002, the Company and SGF subscribed for 748,319 common shares and
362,792 common shares, respectively, in the capital of DPI at a subscription price of CDN$1.50 per share. The aggregate subscription price was CDN$1,666,667. On March 28, 2003, the Company and
SGF subscribed for 748,319 common shares and 362,792 common shares, respectively, in the capital of DPI at a subscription price of CDN$1.50 per share. The aggregate subscription price was
CDN$1,666,667. This amendment is Exhibit 4.6 to this annual report.

On
April 22, 2004, the Company entered into a Share Purchase Agreement with SGF, pursuant to which the Company purchased from SGF 7,670,827 common shares of DPI, representing a
32.7% minority interest in DPI, for $9.6 million (CDN$13 million) in cash. This agreement is Exhibit 4.7 to this annual report.

On
July 16, 2003, DPI entered into a Share Purchase Agreement with Mohammed Barkat, pursuant to which DPI purchased from Mr. Barkat 101,425 common shares of DPI for
CDN$152,138, CDN$83,376 of which was used to repay a loan from DPI to Mr. Barkat, and the remaining $68,762 was paid in cash. This agreement is Exhibit 4.8 to this annual report.

On
July 16, 2003, DPI entered into a Share Purchase Agreement with Michel Sauvageau, pursuant to which DPI purchased from Mr. Sauvageau 70,028 common shares of DPI for
CDN$105,042, CDN$59,999 of which was used to repay a loan from DPI to Mr. Sauvageau, and the remaining $45,043 was paid in cash. This agreement is Exhibit 4.9 to this annual report.

On
April 2, 2004, DRAXIS entered into an Underwriting Agreement with Desjardins Securities Inc. and CIBC World Markets Inc. pursuant to which the underwriters agreed
to purchase, on a bought deal basis, 3,053,436 units of the Company at a purchase price of $4.82(CDN$6.55) per unit, for aggregate gross proceeds to DRAXIS of approximately $14,704,000
(CDN$20,000,000). DRAXIS granted the underwriters an over-allotment option to purchase up to an additional 458,016 units, exercisable at the issue price any time up to 30 days
following closing of the offering, representing additional gross proceeds of up to $2,206,000 (CDN$3,000,000). Each unit consists of one common share of the Company and one-half of one
share purchase warrant. Each whole warrant entitles the holder to acquire one common share of the Company at a price of CDN$8.50 at any time prior to April 24, 2006. This agreement is
Exhibit 4.12 to this annual report.

On
July 22, 2003, the Company entered into an Asset Purchase Agreement with Shire, pursuant to which the Company sold Shire the rights to substantially all remaining products of
its Canadian pharmaceutical sales and marketing division, Draxis Pharmaceutica, in return for US$9.6 million (CDN$13.5 million) in cash and up to an additional US$2.9 million
(CDN$4.0 million) in market-driven contingent milestone payments, plus royalties on future product sales. Under the terms of the

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agreement,
DRAXIS received the value of acquired inventories, and Shire assumed responsibility for the financial provisions of the license agreement related to Permax®. This agreement is
Exhibit 4.13 to this annual report.

On
September 24, 2003, the Company, upon the recommendation of the Human Resources and Compensation Committee, entered into a Retirement Compensation Agreement ("RCA") with
Dr. Barkin to phase out the liability of the Company under the termination without cause provisions of his employment agreement. The RCA calls for the Company to make payments totalling
CDN$1.4 million to Dr. Barkin, CDN$600,000 which was paid in August 2003; and the remaining CDN$800,000 is to be paid in equal quarterly installments in arrears commencing with
the fourth quarter of 2003 and ending with the fourth quarter of 2005. Dr. Barkin's employment agreement has been amended to provide that upon the last RCA payment, the Company shall have no
liability toward Dr. Barkin with respect to the termination without cause provisions of his employment agreement. However, in the event of a termination without cause following a defined change
of control of the Company, any payments received by Dr. Barkin pursuant to the RCA shall be credited to the lump sum amount to be paid to him upon said event. This agreement is
Exhibit 4.23 to this annual report.

In
April 2004, the Company entered into an employment agreement with Mr. Brazier, pursuant to which Mr. Brazier is entitled, in the event his employment is
terminated without cause during the period commencing July 21, 2003 and ending July 21, 2005, to two times his base salary. In the event that Mr. Brazier determines, during the
period commencing June 1, 2005 and ending on June 30, 2005, in his discretion, that the position of Senior Vice President Corporate Development and Strategic Planning is not satisfactory
to him, then he may terminate his employment and receive the sum that the Company would have paid to him following the Shire transaction if his employment had been terminated at that time following
the change of control of DRAXIS Pharmaceutica. In the event that Mr. Brazier is terminated without cause after July 21, 2005, he would be entitled to receive a payment equal to one year
of base salary. This agreement is Exhibit 4.24 to this annual report.

In
April 2003, the Company entered into an employment agreement with Mr. Durham, pursuant to which Mr. Durham agreed to be employed as the President of DPI. In the
event that Mr. Durham is terminated without cause, he would be entitled to receive a payment equal to one year of base salary. In the event that Mr. Durham is terminated following a
defined change of control, he would be entitled to receive a payment equal to two years of base salary. This agreement is Exhibit 4.27 to this annual report.

In
October 2003, the Company entered into an employment agreement with Ms. Gualtieri, pursuant to which Ms. Gualtieri agreed to be employed as General Counsel and
Corporate Secretary of DRAXIS. In the event that Ms. Gualtieri is terminated without cause, she would be entitled to receive a payment equal to one year of base salary. In the event that
Ms. Gualtieri is terminated following a defined change of control, she would be entitled to receive a payment equal to two years of base salary. This agreement is Exhibit 4.29 to this
annual report.

In
March 2004, the Company entered 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 terminated without cause, he would be entitled to receive a payment equal to one year of base salary. In the event that Mr. Huang is terminated
following a defined change of control, he would be entitled to receive a payment equal to two years of annual remuneration. This agreement is Exhibit 4.31 to this annual report.

In
March 2004, the Company entered 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 terminated without cause, he would be entitled to receive a payment equal to one year of base salary. In the event that Mr. Oleksiw is terminated
following a defined change of control, he

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would
be entitled to receive a payment equal to two years of annual remuneration. This agreement is Exhibit 4.32 to this annual report.

In
March 2004, in order to conform with the terms of the Stock Option Plan approved by the shareholders of the Company in 2001, the Company entered into amended employment
agreements with Mr. Carter, Mr. Durham, Ms. Gualtieri and Mr. Ormiston. Under the terms of the amended employment agreements, in the event of termination of employment
following a defined change of control of the Company, Mr. Carter, Mr. Durham, Ms. Gualtieri and Mr. Ormiston, as the case may be, would be entitled to exercise all stock
options and other securities, including those not then otherwise exercisable. In addition, under the terms of the amended employment agreement, Ms. Gualtieri is entitled, in the event of a
termination following a defined change of control, to receive a payment equal to two years annual remuneration. These agreements are Exhibits 4.26, 4.28, 4.30 and 4.34 to this annual report.

Exchange Controls

Canada has no system of exchange controls. There are no exchange restrictions on borrowing from foreign countries or on the remittance of dividends, interest,
royalties and similar payments, management fees, loan repayments, settlement of trade debts or the repatriation of capital. There are
no limits on the rights of non-Canadians to exercise voting rights on their common shares of the Company.

Taxation

The following summary describes the principal Canadian federal income tax considerations generally applicable under the Income Tax Act (Canada) (the "ITA") to a
holder of the Company's common shares who has never been resident or deemed to have been resident in Canada for the purposes of the ITA and who holds common shares as capital property and does not
hold or use and is not deemed to hold or use such common shares in or in the course of carrying on a business in Canada. The summary is based on the current provisions of the ITA, the regulations
thereunder in force on the date hereof, all proposed amendments to the ITA and regulations publicly announced by the Minister of Finance (Canada) prior to the date hereof (the "Amendments"), and on
the understanding of counsel of the current published administrative and assessing practices of the Canada Revenue Agency. This summary is not exhaustive of all possible Canadian federal income tax
considerations, and except as mentioned above, does not take into account any prospective changes to the tax law of Canada, whether occasioned by legislative, governmental, or judicial action.
Further, the summary does not take account of foreign or provincial tax legislation or considerations that may vary from the Canadian federal income tax implications 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 consult his or her own tax advisor.

Dividends on shares by shareholders who are not residents of Canada

Dividends, including stock and cash dividends and certain distributions and redemptions deemed to be dividends under the ITA, on the common shares paid to
non-residents of Canada will be subject to Canadian withholding tax at a rate of twenty-five percent (25%). The applicable rate of withholding may, however, be reduced by
virtue of the terms of any applicable tax treaty. Under the terms of the Canada-U.S. Income Tax Convention, 1980 (the "Treaty"), the rate which is generally applicable to United States
resident individuals who are beneficial owners of common shares in respect of which there is paid or credited or deemed by the ITA to be paid or credited Canadian-source dividends is fifteen percent
(15%); in certain cases where the holder is a company owning more than ten percent (10%) of the common shares, five percent (5%) for dividends paid. Under the Treaty, certain

95

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tax-exempt
entities that are resident in the United States may be exempt from Canadian withholding taxes, including any withholding tax levied in respect of dividends received on the
common shares.

Dividends on shares by shareholders who are residents of Canada

Dividends, including stock and cash dividends and certain distributions and redemptions deemed to be dividends under the ITA, on the common shares of the Company
paid to residents of Canada will be included in computing their income and will be subject to the gross-up and dividend tax credit rules normally applicable to taxable dividends paid by
taxable Canadian corporations. A holder that is a corporation may be liable to pay refundable tax under Part IV of the ITA. However, a public corporation that is not controlled, whether because
of a beneficial interest in one or more trusts or otherwise, by or for the benefit of an individual (other than a trust) or related group of individuals (other than trusts) will not be liable to pay
refundable tax under Part IV of the ITA.

In
the case of a holder of common shares of the Company that is a corporation, the amount of any capital loss otherwise determined resulting from the disposition of a common share of the
Company may be reduced by the amount of dividends previously received or deemed to have been received thereon. Any such restriction will not occur where the corporate holder owned the common share of
the Company for 365 days or longer and such holder (together with any persons with whom it did not deal with at arm's length) did not own more than five percent (5%) of the shares of any class
or series of shares at the time the relevant dividends were received or deemed to have been received. Analogous rules apply where a corporation is a member of a partnership or a beneficiary of a
trust, which owns common shares of the Company.

Dispositions by shareholders who are not residents of Canada

Capital gains arising as a consequence of the disposition of common shares (other than to the Company) by a resident of the United States will normally be exempt
from taxation under the ITA except to the extent that such shares constitute or are deemed to constitute taxable Canadian property ("TCP") (as defined in the ITA), the gain on which would not
otherwise be exempt under the terms of the Treaty. In general, the common shares will not constitute TCP of a non-resident holder unless (i) such holder holds the common shares as
capital property and uses them in carrying on a business in Canada, (ii) the holder is a non-resident insurer who holds the common shares as capital property and holds or uses such
shares in the course of carrying on an insurance business in Canada in a particular taxation year, or (iii) at any time in the five-year period immediately preceding the
disposition, not less than twenty-five percent (25%) of the issued shares of any class of the capital stock of the Company belonged to such holder, to persons not dealing at arm's length
with him or to such holder and persons not dealing at arm's length with him. For the purposes of the twenty-five percent (25%) test, a person holding an option to acquire common shares or
other securities convertible into or exchangeable for common shares, or otherwise having an interest in common shares, will be considered to own such shares. Special rules apply to deem certain
partnership interests, where fifty percent (50%) or more of the value of the underlying partnership's property is represented by TCP, to be TCP. Consequently, a resident of the United States who
disposes of such partnership interests will be required to comply with certain notification procedures, including obtaining a certificate from Canada Customs and Revenue Agency in respect of the
disposition.

To
the extent that the common shares do constitute TCP of the non-resident holder and the disposition thereof results in a capital gain, such holder will normally be obliged
to recognize that gain and pay tax thereon pursuant to the provisions of the ITA. However, the Treaty will normally apply to exempt the United States resident holder of common shares from such tax,
provided that the value of such shares is not derived principally from real property and/or interests therein situate in Canada at the time the common shares are disposed of and provided such holder
does not have and has not had

96

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within
the 12-month period preceding the disposition a permanent establishment or fixed base available to such holder in Canada.

Disposition by shareholders who are residents of Canada

On a disposition or deemed disposition of a common share of the Company a resident of Canada holder will receive a capital gain (or capital loss) equal to the
amount by which the proceeds of disposition for the common share exceeded (or are less than) the aggregate of any cost of disposition and the adjusted cost base to the holder of the common share of
the Company immediately before the disposition. Pursuant to the ITA, a holder of common shares of the Company who is a resident of Canada will be required to include in income one-half
(1/2) of the amount of any capital gain and may deduct one-half (1/2) of the amount of any capital loss against taxable capital gains realized by the holder
in the year of the disposition. Allowable capital losses in excess of taxable capital gains may be carried back and deducted in any of the three proceeding years or carried forward and deducted in any
following year against taxable capital gains realized in such years to the extent and under the circumstances described in the ITA and the Amendments.

A
Canadian-controlled private corporation will also be subject to a refundable tax of sixty-six and two-thirds percent (662/3%) on certain
investment income, including taxable capital gains realized on the disposition of common shares of the Company, that will be refundable when the corporation pays taxable dividends (at a rate of
CDN$1.00 for every CDN$3.00 of taxable dividend paid).

A
capital loss realized by a holder of common shares of the Company that is a corporation, a partnership of which a corporation is a member or a trust of which a corporation is a
beneficiary may be reduced by the amount of dividends received in certain circumstances. Capital gains received by an individual may give rise to a liability for alternative minimum tax.

Documents on Display

The Company is subject to the information requirements of the U.S. Securities Exchange Act of 1934, as amended. In accordance with these requirements, the Company
files reports and other information with the United States Securities and Exchange Commission. These materials, including this Annual Report and the exhibits thereto, may be inspected and copied at
the Commission's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of the materials may be obtained 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 the
operation of the Commission's Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330. The Commission also maintains a web site at
http://www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the Commission. The Company's annual reports and some of the other
information submitted by the Company to the Commission may be accessed through this web site. In addition, material filed by the Company can 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 web site http://www.sedar.

Item 11.    Quantitative and Qualitative Disclosures About Market Risk

Market Risk

We are exposed to financial market risks, including changes in foreign currency exchange rates, interest rates on investments and debt obligations. We do not use
derivative financial instruments for speculative or trading purposes.

97

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Inflation
has not had a significant impact on our results of operations.

Foreign Currency Risk

The Company's reporting currency is the U.S. dollar. The functional currency for its Canadian operationswhich includes the radiopharmaceutical
segment, contract manufacturing segment and royalties and milestones related to product rights sold to Shireis the Canadian dollar. Accordingly, the Company's foreign exchange exposure
for accounting purposes mainly relates to U.S.-denominated monetary assets of these operations. The Company currently does not actively hedge this exposure but reduces the exposure by maintaining the
minimum level of U.S.-denominated cash available to meet its short-term cash requirements.

Interest Rate Risk

The primary objective of our investment policy is the protection of principal, and accordingly we invest in high-grade commercial paper and government
securities with varying maturities, but typically less than 90 days. As it is our intent and policy to hold these investments until maturity, we do not have a material exposure to interest rate
risk. Therefore, a 100-basis-point adverse change in interest rates would not have a material effect on our investment portfolio.

We
are exposed to interest rate risk on borrowings from our term bank loan facility and unsecured obligation. The term bank loan facility bears interest based on the Canadian dollar
prime rate and the unsecured obligation bears interest based on the Bank of Canada rate. Based on projected advances under both facilities, a 100-basis-point adverse change in interest
rates would not have a material effect on our financial position.

Item 12.    Description of Securities Other Than Equity Securities

Not Applicable

98

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Management's Report

The Company's management is responsible for preparing the accompanying consolidated financial statements in conformity with United States generally accepted
accounting principles ("GAAP"). In preparing these consolidated financial statements, management selects accounting policies and uses its judgment and best estimates, as appropriate in the
circumstances. Management has determined such amounts on a reasonable basis in order to ensure that the financial statements are presented fairly, in all material respects.

The
Company maintains a system of internal accounting controls designed to provide reasonable assurance, at a reasonable cost, that assets are safeguarded and that transactions are
executed and recorded in accordance with the Company's policies. This system is supported by policies and procedures for key business activities, by the hiring of qualified staff and by a continuous
planning and monitoring program.

Deloitte &
Touche LLP has been engaged by the Company's shareholders to audit the consolidated financial statements. During the course of their audit, Deloitte & Touche LLP
reviewed the Company's system of internal controls to the extent necessary to render their opinion on the consolidated financial statements.

The
Board of Directors is responsible for ensuring that management fulfills its responsibility for financial reporting and is ultimately responsible for reviewing and approving the
financial statements. The Board carries out the responsibility principally through its Audit Committee. The members of the Audit Committee are outside Directors. The Committee considers, for review by
the Board of Directors and approval by the shareholders, the engagement or reappointment of the external auditors. Deloitte & Touche LLP has full and free access to the Audit Committee.

Management
acknowledges its responsibility to provide financial information that is representative of the Company's operations, is consistent and reliable, and is relevant for the
informed evaluation of the Company's activities.

Financial
statements prepared in accordance with Canadian GAAP are available to all shareholders.

/s/ Martin Barkin, MD, FRCSC

/s/ Mark Oleksiw,CAPresident and Chief Executive Officer

Chief Financial Officer


Mississauga, Ontario
February 5, 2004, except for Note 25, which is as of March 31, 2004

F-1

---



Independent Auditors' Report

To
the Shareholders of
DRAXIS Health Inc.

We
have audited the consolidated balance sheets of DRAXIS Health Inc. as at December 31, 2003 and 2002 and the consolidated statements of operations, shareholders' equity
and cash flows for each of the years in the three-year period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in Canada and the United States of America. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed.

In
our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2003 and 2002 and the
results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2003 in accordance with generally accepted accounting principles in
the United States of America.

On
February 5, 2004, except for Note 25, which is as of March 31, 2004, we reported separately to shareholders of the Company, based on our audits, where we
expressed an opinion without reservation on the financial statements for the same periods prepared in accordance with generally accepted accounting principles in Canada.

/s/
DELOITTE & TOUCHE LLP
Chartered Accountants

Montreal,
Quebec
February 5, 2004, except for Note 25, which is as of March 31, 2004

F-2

---





DRAXIS HEALTH INC.        Consolidated Statements of Operations        Years ended December 31(in thousands of U.S. dollars except share-related data)

|                                                                  |                                     | 2003 |        | 2002   |   | 2001   |       
|----------------------------------------------------------------- | ----------------------------------- | ---- | ------ | ------ | - | ------ | ------
|REVENUES                                                          |                                     |      |        |        |   |        |       
|                                                                  | Product sales                       |      | $      | 40,535 |   | $      | 30,338
|                                                                  | Royalty and licensing (Note 17)     |      |        | 8,658  |   |        | 8,302 
|                                                                  |                                     |      |        |        |   |        |       
|                                                                  |                                     |      | 49,193 |        |   | 38,640 |       
|                                                                  |                                     |      |        |        |   |        |       
|EXPENSES                                                          |                                     |      |        |        |   |        |       
|                                                                  | Cost of goods sold (Note 4)         |      |        | 27,722 |   |        | 23,404
|                                                                  | Selling, general and administration |      |        | 9,904  |   |        | 7,542 
|                                                                  | Research and development            |      |        | 1,594  |   |        | 1,996 
|                                                                  | Depreciation and amortization       |      |        | 3,287  |   |        | 2,804 
|                                                                  |                                     |      |        |        |   |        |       
|                                                                  |                                     |      | 42,507 |        |   | 35,746 |       
|                                                                  |                                     |      |        |        |   |        |       
|Operating income                                                  |                                     |      | 6,686  |        |   | 2,894  |       
|Financing expense, net (Note 5)                                   |                                     |      | (1,532 | )      |   | (280   | )     
|                                                                  |                                     |      |        |        |   |        |       
|Income before undernoted                                          |                                     |      | 5,154  |        |   | 2,614  |       
|Income taxes (Note 6)                                             |                                     |      | 874    |        |   | (154   | )     
|Minority interest                                                 |                                     |      | 391    |        |   | 252    |       
|                                                                  |                                     |      |        |        |   |        |       
|Income (loss) from continuing operations                          |                                     |      | 4,671  |        |   | 3,020  |       
|Income (loss) from discontinued operations, net of taxes (Note 7) |                                     |      | 8,531  |        |   | (834   | )     
|                                                                  |                                     |      |        |        |   |        |       
|Net income (loss)                                                 |                                     | $    | 13,202 |        | $ | 2,186  |       
|                                                                  |                                     |      |        |        |   |        |       
|Basic income (loss) per share (Note 8)                            |                                     |      |        |        |   |        |       
|                                                                  | from continuing operations          |      | $      | 0.13   |   | $      | 0.08  
|                                                                  | from discontinued operations        |      |        | 0.23   |   |        | (0.02 
|                                                                  |                                     |      |        |        |   |        |       
|                                                                  |                                     | $    | 0.36   |        | $ | 0.06   |       
|                                                                  |                                     |      |        |        |   |        |       
|Diluted income (loss) per share (Note 8)                          |                                     |      |        |        |   |        |       
|                                                                  | from continuing operations          |      | $      | 0.13   |   | $      | 0.08  
|                                                                  | from discontinued operations        |      |        | 0.23   |   |        | (0.02 
|                                                                  |                                     |      |        |        |   |        |       
|                                                                  |                                     | $    | 0.36   |        | $ | 0.06   |       
|                                                                  |                                     |      |        |        |   |        |       

APPROVED BY THE BOARD/s/ Brian King

/s/ Martin Barkin, MDDirector

DirectorDirector


See the accompanying notes to the Consolidated Financial Statements

F-3

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DRAXIS HEALTH INC.        Consolidated Balance Sheets        December 31(in thousands of U.S. dollars except share-related data)

|                                                                                                                                                             |                                                    | 2003 |         | 2002   |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------- | ---- | ------- | ------ | -
|ASSETS                                                                                                                                                       |                                                    |      |         |        |  
|CURRENT                                                                                                                                                      |                                                    |      |         |        |  
|                                                                                                                                                             | Cash and cash equivalents                          |      | $       | 10,563 |  
|                                                                                                                                                             | Restricted cash (Note 9)                           |      |         | 976    |  
|                                                                                                                                                             | Accounts receivable (Note 10)                      |      |         | 9,898  |  
|                                                                                                                                                             | Inventories (Note 11)                              |      |         | 6,096  |  
|                                                                                                                                                             | Prepaid expenses                                   |      |         | 688    |  
|                                                                                                                                                             | Deferred income taxes, net (Note 6)                |      |         | 2,806  |  
|                                                                                                                                                             |                                                    |      |         |        |  
|                                                                                                                                                             |                                                    |      | 31,027  |        |  
|Property, plant and equipment, net (Note 12)                                                                                                                 |                                                    |      | 32,917  |        |  
|Goodwill, net (Note 13)                                                                                                                                      |                                                    |      | 677     |        |  
|Intangible assets, net (Note 14)                                                                                                                             |                                                    |      | 1,974   |        |  
|Other assets                                                                                                                                                 |                                                    |      | 565     |        |  
|Deferred income taxes, net (Note 6)                                                                                                                          |                                                    |      | 9,393   |        |  
|                                                                                                                                                             |                                                    |      |         |        |  
|                                                                                                                                                             |                                                    | $    | 76,553  |        | $
|                                                                                                                                                             |                                                    |      |         |        |  
|LIABILITIES                                                                                                                                                  |                                                    |      |         |        |  
|CURRENT                                                                                                                                                      |                                                    |      |         |        |  
|                                                                                                                                                             | Bank indebtedness (Note 15)                        |      | $       |       |  
|                                                                                                                                                             | Accounts payable and accrued liabilities (Note 16) |      |         | 6,708  |  
|                                                                                                                                                             | Current portion of deferred revenues (Note 17)     |      |         | 5,309  |  
|                                                                                                                                                             | Current portion of long-term debt (Note 18)        |      |         | 981    |  
|                                                                                                                                                             | Customer deposits                                  |      |         | 591    |  
|                                                                                                                                                             |                                                    |      |         |        |  
|                                                                                                                                                             |                                                    |      | 13,589  |        |  
|Deferred revenues (Note 17)                                                                                                                                  |                                                    |      | 7,593   |        |  
|Long-term debt (Note 18)                                                                                                                                     |                                                    |      | 9,485   |        |  
|Minority interest                                                                                                                                            |                                                    |      | 4,239   |        |  
|                                                                                                                                                             |                                                    |      |         |        |  
|                                                                                                                                                             |                                                    |      | 34,906  |        |  
|                                                                                                                                                             |                                                    |      |         |        |  
|Commitments and contingencies (Note 22)                                                                                                                      |                                                    |      |         |        |  
|SHAREHOLDERS' EQUITY                                                                                                                                         |                                                    |      |         |        |  
|Common stock, without par value of unlimited shares authorized, 37,297,817 and 37,098,690 issued and outstanding at December 31, 2003 and 2002, respectively |                                                    |      | 61,175  |        |  
|Additional paid-in capital                                                                                                                                   |                                                    |      | 15,667  |        |  
|Employee participation shares; 2,000,000 shares authorized (Note 20(c))                                                                                      |                                                    |      | 86      |        |  
|Less: loans receivable                                                                                                                                       |                                                    |      | (86     | )      |  
|Deficit                                                                                                                                                      |                                                    |      | (35,481 | )      |  
|Accumulated other comprehensive income (loss)                                                                                                                |                                                    |      | 286     |        |  
|                                                                                                                                                             |                                                    |      |         |        |  
|                                                                                                                                                             |                                                    |      | 41,647  |        |  
|                                                                                                                                                             |                                                    |      |         |        |  
|                                                                                                                                                             |                                                    | $    | 76,553  |        | $
|                                                                                                                                                             |                                                    |      |         |        |  

See the accompanying notes to the Consolidated Financial Statements

F-4

---





DRAXIS HEALTH INC.        Consolidated Statements of Shareholders' Equity        December 31(in thousands of U.S. dollars except share-related data)

|                                               |                                                       | 2003 |            | 2002    |   | 2001       |        
|---------------------------------------------- | ----------------------------------------------------- | ---- | ---------- | ------- | - | ---------- | -------
|Common Stock (Number of Shares)                |                                                       |      |            |         |   |            |        
|Balance, beginning of year                     |                                                       |      | 37,098,690 |         |   | 36,613,434 |        
|                                               | Exercise of warrants                                  |      |            |        |   |            |       
|                                               | Exercise of options                                   |      |            | 240,334 |   |            | 468,168
|                                               | Exercise of employee participation shares             |      |            | 9,093   |   |            | 17,088 
|                                               | Repurchased for cancellation                          |      |            | (50,300 | ) |            |       
|                                               |                                                       |      |            |         |   |            |        
|Balance, end of year                           |                                                       |      | 37,297,817 |         |   | 37,098,690 |        
|                                               |                                                       |      |            |         |   |            |        
|Common Stock                                   |                                                       |      |            |         |   |            |        
|Balance, beginning of year                     |                                                       | $    | 60,652     |         | $ | 59,781     |        
|                                               | Exercise of options                                   |      |            | 563     |   |            | 817    
|                                               | Exercise of employee participation shares             |      |            | 30      |   |            | 54     
|                                               | Repurchased for cancellation                          |      |            | (70     | ) |            |       
|                                               |                                                       |      |            |         |   |            |        
|Balance, end of year                           |                                                       | $    | 61,175     |         | $ | 60,652     |        
|                                               |                                                       |      |            |         |   |            |        
|Additional Paid-In Capital                     |                                                       |      |            |         |   |            |        
|Balance, beginning of year                     |                                                       | $    | 15,550     |         | $ | 15,476     |        
|                                               | Stock compensation                                    |      |            | 112     |   |            |       
|                                               | Fair value associated with expired warrants           |      |            |        |   |            | 74     
|                                               | Common shares purchased for cancellation (Note 20(e)) |      |            | 5       |   |            |       
|                                               |                                                       |      |            |         |   |            |        
|Balance, end of year                           |                                                       | $    | 15,667     |         | $ | 15,550     |        
|                                               |                                                       |      |            |         |   |            |        
|Employee Participation Shares                  |                                                       |      |            |         |   |            |        
|Balance, beginning of year                     |                                                       | $    | 140        |         | $ | 166        |        
|                                               | Cancellation of employee participation shares         |      |            | (27     | ) |            |       
|                                               | Exercise of employee participation shares             |      |            | (27     | ) |            | (26    
|                                               |                                                       |      |            |         |   |            |        
|Balance, end of year                           |                                                       | $    | 86         |         | $ | 140        |        
|                                               |                                                       |      |            |         |   |            |        
|Employee Participation Shares-Loans Receivable |                                                       |      |            |         |   |            |        
|Balance, beginning of year                     |                                                       | $    | (140       | )       | $ | (166       | )      
|                                               | Cancellation of employee participation shares         |      |            | 27      |   |            |       
|                                               | Exercise of employee participation shares             |      |            | 27      |   |            | 26     
|                                               |                                                       |      |            |         |   |            |        
|Balance, end of year                           |                                                       | $    | (86        | )       | $ | (140       | )      
|                                               |                                                       |      |            |         |   |            |        
|Warrants                                       |                                                       |      |            |         |   |            |        
|Balance, beginning of year                     |                                                       | $    |           |         | $ | 74         |        
|                                               | Expiry of warrants                                    |      |            |        |   |            | (74    
|                                               |                                                       |      |            |         |   |            |        
|Balance, end of year                           |                                                       | $    |           |         | $ |           |        
|                                               |                                                       |      |            |         |   |            |        
|Deficit                                        |                                                       |      |            |         |   |            |        
|Balance, beginning of year                     |                                                       | $    | (48,683    | )       | $ | (50,869    | )      
|                                               | Net income (loss)                                     |      |            | 13,202  |   |            | 2,186  
|                                               |                                                       |      |            |         |   |            |        
|Balance, end of year                           |                                                       | $    | (35,481    | )       | $ | (48,683    | )      
|                                               |                                                       |      |            |         |   |            |        
|Accumulated Other Comprehensive Income (Loss)  |                                                       |      |            |         |   |            |        
|Balance, beginning of year                     |                                                       | $    | (7,292     | )       | $ | (7,584     | )      
|                                               | Other comprehensive income (loss)                     |      |            | 7,578   |   |            | 292    
|                                               |                                                       |      |            |         |   |            |        
|Balance, end of year                           |                                                       |      | 286        |         |   | (7,292     | )      
|                                               |                                                       |      |            |         |   |            |        
|                                               | Total shareholders' equity                            |      | $          | 41,647  |   | $          | 20,227 
|                                               |                                                       |      |            |         |   |            |        
|Comprehensive Income (Loss)                    |                                                       |      |            |         |   |            |        
|                                               | Foreign currency translation adjustments              |      | $          | 7,578   |   | $          | 292    
|                                               |                                                       |      |            |         |   |            |        
|Other comprehensive income (loss)              |                                                       |      | 7,578      |         |   | 292        |        
|Net income (loss)                              |                                                       |      | 13,202     |         |   | 2,186      |        
|                                               |                                                       |      |            |         |   |            |        
|Total comprehensive income (loss)              |                                                       | $    | 20,780     |         | $ | 2,478      |        
|                                               |                                                       |      |            |         |   |            |        

See the accompanying notes to the Consolidated Financial Statements

F-5

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DRAXIS HEALTH INC.        Consolidated Statements Of Cash Flows        Years ended December 31(in thousands of U.S. dollars)

|                                                      |                                                                                                                       | 2003 |        | 2002    |   | 2001   |       
|----------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ---- | ------ | ------- | - | ------ | ------
|CASH FLOWS (USED IN) FROM OPERATING ACTIVITIES        |                                                                                                                       |      |        |         |   |        |       
|Net income (loss) from continuing operations          |                                                                                                                       | $    | 4,671  |         | $ | 3,020  |       
|                                                      | Adjustments to reconcile net income (loss) from continuing operations to net cash (used in) from operating activities |      |        |         |   |        |       
|                                                      | Amortization of deferred revenues                                                                                     |      |        | (6,811  | ) |        | (6,568
|                                                      | Depreciation and other amortization                                                                                   |      |        | 3,287   |   |        | 2,804 
|                                                      | Stock compensation                                                                                                    |      |        | 112     |   |        | 28    
|                                                      | Deferred income taxes                                                                                                 |      |        | 39      |   |        | (1,181
|                                                      | Minority interest                                                                                                     |      |        | (391    | ) |        | (252  
|                                                      | Other                                                                                                                 |      |        | 799     |   |        | 376   
|Changes in operating assets and operating liabilities |                                                                                                                       |      |        |         |   |        |       
|                                                      | Accounts receivable                                                                                                   |      |        | (285    | ) |        | (401  
|                                                      | Inventories                                                                                                           |      |        | (93     | ) |        | (835  
|                                                      | Income taxes                                                                                                          |      |        | (803    | ) |        | (235  
|                                                      | Prepaid expenses                                                                                                      |      |        | (149    | ) |        | (185  
|                                                      | Accounts payable and accrued liabilities                                                                              |      |        | (3,597  | ) |        | 1,245 
|                                                      | Current portion of deferred revenues                                                                                  |      |        |        |   |        |      
|                                                      |                                                                                                                       |      |        |         |   |        |       
|                                                      |                                                                                                                       |      | (3,221 | )       |   | (2,184 | )     
|                                                      |                                                                                                                       |      |        |         |   |        |       
|CASH FLOWS (USED IN) FROM INVESTING ACTIVITIES        |                                                                                                                       |      |        |         |   |        |       
|                                                      | Expenditures for property, plant and equipment                                                                        |      |        | (3,536  | ) |        | (5,390
|                                                      | (Increase) decrease in intangible assets                                                                              |      |        | (122    | ) |        | (60   
|                                                      | Increase in deferred revenues                                                                                         |      |        | 165     |   |        | 899   
|                                                      |                                                                                                                       |      |        |         |   |        |       
|                                                      |                                                                                                                       |      | (3,493 | )       |   | (4,551 | )     
|                                                      |                                                                                                                       |      |        |         |   |        |       
|CASH FLOWS (USED IN) FROM FINANCING ACTIVITIES        |                                                                                                                       |      |        |         |   |        |       
|                                                      | Proceeds from bank indebtedness                                                                                       |      |        | 4,942   |   |        | 382   
|                                                      | Repayment of bank indebtedness                                                                                        |      |        | (5,927  | ) |        | (1,190
|                                                      | Proceeds from long-term debt                                                                                          |      |        | 947     |   |        | 5,243 
|                                                      | Repayment of long-term debt                                                                                           |      |        | (3,013  | ) |        | (172  
|                                                      | Proceeds from customer deposits                                                                                       |      |        | 80      |   |        | 709   
|                                                      | Repayment of customer deposits                                                                                        |      |        | (2,124  | ) |        | (232  
|                                                      | Exercise of warrants, options and employee participation shares                                                       |      |        | 593     |   |        | 844   
|                                                      | Common shares purchased for cancellation                                                                              |      |        | (65     | ) |        |      
|                                                      | Issue of common shares by subsidiary to minority interest (Note 19)                                                   |      |        | 365     |   |        | 969   
|                                                      | Repurchase of common shares by subsidiary from minority interest                                                      |      |        | (140    | ) |        | (177  
|                                                      |                                                                                                                       |      |        |         |   |        |       
|                                                      |                                                                                                                       |      | (4,342 | )       |   | 6,376  |       
|                                                      |                                                                                                                       |      |        |         |   |        |       
|                                                      | Effect of foreign exchange rate changes on cash and cash equivalents                                                  |      |        | 597     |   |        | 95    
|                                                      |                                                                                                                       |      |        |         |   |        |       
|                                                      | Net cash (used in) from continuing operations                                                                         |      |        | (10,459 | ) |        | (264  
|                                                      | Net cash from (used in) discontinued operations                                                                       |      |        | 16,123  |   |        | (439  
|                                                      |                                                                                                                       |      |        |         |   |        |       
|                                                      | Net increase (decrease) in cash and cash equivalents                                                                  |      |        | 5,664   |   |        | (703  
|                                                      | Cash and cash equivalents, beginning of period                                                                        |      |        | 4,899   |   |        | 5,602 
|                                                      |                                                                                                                       |      |        |         |   |        |       
|                                                      | Cash and cash equivalents, end of period                                                                              |      | $      | 10,563  |   | $      | 4,899 
|                                                      |                                                                                                                       |      |        |         |   |        |       
|Additional Information                                |                                                                                                                       |      |        |         |   |        |       
|                                                      | Interest paid                                                                                                         |      | $      | 700     |   | $      | 417   
|                                                      | Income taxes paid                                                                                                     |      | $      | 1,882   |   | $      | 1,791 
|                                                      |                                                                                                                       |      |        |         |   |        |       

See the accompanying notes to the Consolidated Financial Statements

F-6

---





DRAXIS HEALTH INC.  Notes to the Consolidated Financial Statements(in thousands of U.S. dollars except share-related data)

1.    Nature of Operations

DRAXIS Health Inc. ("DRAXIS" or the "Company") is an integrated pharmaceutical company focused in two specialty segments: the development, production,
marketing and distribution of radiopharmaceuticals through its wholly owned subsidiary DRAXIMAGE Inc. ("DRAXIMAGE") and the provision of contract pharmaceutical manufacturing services,
specializing in liquid and freeze-dried injectables and other sterile products through its 67.3%-owned subsidiary DRAXIS Pharma Inc. ("DPI"). The Company's common shares are listed on NASDAQ
and the Toronto Stock Exchange.

2.    Significant Accounting Policies



The Company has prepared these consolidated financial statements in U.S. dollars and in accordance with generally accepted accounting principles ("GAAP") in the
United States.

Consolidated
financial statements prepared in U.S. dollars and in accordance with Canadian GAAP are available to shareholders and filed with various regulatory authorities.



The consolidated financial statements include the accounts of the Company and its subsidiary companies with provision for minority interests. The Company's
effective interest in the voting equity share capital of its principal subsidiaries is 100%, except in the case of DPI, for which it is 67.3% (2002-66.9%; 2001-65.9%). All
intercompany transactions and balances are eliminated on consolidation.



Minority interest represents the minority shareholders' proportionate share of equity and net income or loss of DPI.



The preparation of the Company's consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Estimates are used when accounting for items and matters such as asset impairments, allowance for uncollectible accounts receivable, inventory
obsolescence, warranties and provisions, amortization, deferred and current income taxes, stock compensation and contingencies.



The Company reports its consolidated financial statements in U.S. dollars. The financial statements of the parent company and its non-U.S.
subsidiaries are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." Asset and liability accounts are
translated at the rate of exchange prevailing at the balance sheet date. Shareholders' equity accounts are translated at the applicable historical rate. Revenue and expense accounts are translated at
the average rate of exchange for the period. The cumulative foreign currency

F-7

---



translation
adjustment is reported as a component of accumulated other comprehensive loss in shareholders' equity. The net change in the cumulative foreign currency translation adjustment in the
periods presented is primarily due to fluctuations in the exchange rates between the Company's reporting currency and the Canadian dollar.



Product SalesThe Company recognizes revenue, net of trade discounts and allowances, when evidence of
an arrangement exists, delivery has occurred or services rendered, the price is fixed or determinable and collectability is reasonably assured.

Amounts
received from customers as prepayments for products to be shipped or services provided in the future are reported as customer deposits.

Product
sales include related service revenues which are recognized at the time of performance or proportionately over the term of the contract, as appropriate.

Royalty and LicensingRoyalty revenue is recognized on an accrual basis in accordance with contractual agreements when all
significant contractual obligations have been satisfied, the amounts are determinable and collection is reasonably assured. Royalty revenue is net of amounts owing to sublicensees where the Company is
acting as an agent for the sublicensee.

License
and other forms of non-refundable fees received pursuant to collaboration agreements are accounted for according to the related contractual agreements. In general,
such fees are deferred and recognized on a straight-line basis over the lesser of the contract period and the estimated term over which contractual benefits are expected to be derived. If
payment of such fees is contingent upon future performance obligations of the Company or other future events, revenue recognition of such amounts is deferred and recognized upon completion of the
specific event.



In accordance with SFAS No. 2, "Accounting for Research and Development Costs," research and development costs are expensed in the period in which they are
incurred. Acquired research and development having no alternative future use is written off at the time of acquisition. The cost of intangibles that are purchased from others for a particular research
and development project that have no alternative future use is written off at the time of acquisition.



The liability method of accounting for income taxes is used in accordance with SFAS No. 109, "Accounting for Income Taxes." Under this method, deferred tax
assets and liabilities are recognized for the differences between the financial statement and income tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. A
valuation allowance is provided for the portion of deferred tax assets which are more likely than not to be unrealized. Deferred tax assets and liabilities are measured using the enacted tax rates and
laws.



All highly liquid investments with original maturities of three months or less are classified as cash and cash equivalents. The fair value of cash and cash
equivalents approximates the amounts shown in the financial statements.

F-8

---





Inventories are comprised of raw materials, work-in-process and finished goods. Raw materials are valued at the lower of cost on a moving
average basis and replacement cost. Work-in-process is valued at the lower of cost and net realizable value and includes material, direct labour, and related manufacturing and
overhead costs. Finished goods are valued at the lower of cost on a first-in, first-out basis and net realizable value and include all related manufacturing, packaging and
overhead costs.



Property, plant and equipment are reported at cost, less accumulated depreciation. The Company provides for depreciation using the following methods and applying
rates estimated to amortize the cost over the useful life of the assets:

Building

straight-line over 25 yearsEquipment

20%-30% declining balance and straight-line over 5-10 years


Expenditures
for construction of assets incurred prior to productive use are reflected as assets under construction. Depreciation commences when an asset is substantially completed and
ready for productive commercial use.



Effective with the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002, goodwill is no longer subject to
amortization over its estimated useful life. Goodwill is subject to at least an annual assessment of impairment by applying a fair-value-based test.



Acquired intangible assets which do not have regulatory approval and for which there are no alternative uses are expensed as acquired in-process
research and development, and those that have regulatory approval are capitalized.

Intangible
assets with finite lives are reported at cost, less accumulated amortization. The Company does not have any intangible assets with indefinite lives. The Company provides for
amortization on a straight-line basis on the following estimated useful lives:

Patents and trademarks

10 yearsLicenses

9 - 15 years


The
Company uses a discounted cash flow model to value the assessments of impairment that requires assumptions about the timing and amount of future cash flows, risk, the cost of capital
and terminal values. Intangible assets are reviewed for impairment on an annual basis.



Under the provisions of SFAS No. 123, "Accounting for Stock Compensation," companies can either measure the compensation cost of equity instruments issued
under employee compensation plans using a fair-value-based method or can continue to recognize compensation cost using the intrinsic value method under the provisions of Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." However, if the provisions of APB No. 25 are applied, pro forma disclosure of net income (loss) and
earnings (loss) per share must be presented in the financial statements as if the fair-value method had been applied. For all periods presented, the Company recognized compensation costs
under the provisions of APB No. 25, and the Company has provided the expanded disclosure required by SFAS No. 123.

F-9

---



3.    Accounting Changes



Effective January 1, 2002, the Company adopted the new recommendations of the SFAS with respect to Statement No. 142, "Goodwill and Other Intangible
Assets." Under SFAS No. 142, which can only be applied prospectively, goodwill and other intangible assets with indefinite lives are no longer amortized, but are tested for impairment upon
adoption of the new standard and at least annually thereafter. The Company has assessed its goodwill by applying the prescribed method of comparing the fair value of its reporting unit to its carrying
value and determined that there has been no goodwill impairment. The Company does not have any intangible assets with indefinite lives.

The
following is a reconciliation of net income (loss) to reflect the impact of no longer amortizing goodwill effective January 1, 2002.

2003

2002

2001Net income (loss), as reported

$
13,202

$
2,186

$
(1,584
)Amortization expense on goodwill








103Net income (loss), adjusted

$
13,202

$
2,186

$
(1,481
)




Effective January 1, 2002, the Company adopted the new recommendations of the SFAS with respect to Statement No. 141, "Business Combinations." Under
SFAS No. 141, if certain criteria are met upon the initial adoption, reclassifications between goodwill and other intangible assets are required for any business combinations before
July 1, 2001. The implementation of SFAS No. 141 resulted in reclassifications from goodwill to intangible assets of $1,627.

4.    Cost of Goods Sold

On July 28, 2003, Draxis received insurance proceeds of $730 in settlement of physical damage and business interruption losses related to installation
problems of its first lyophilizer unit in 2000. The damage resulted in, amongst other things, delays in the commissioning of the lyophilization unit and in obtaining FDA approvals for the transfer of
production of the DRAXIMAGE line of lyophilized diagnostic imaging products to DRAXIS Pharma Inc. FDA approval was ultimately obtained in 2001 and costs incurred related to the incident were
charged to the statement of operations when incurred. No accrual for insurance proceeds had been previously recorded as the claim represented a contingent gain. The proceeds were recognized as a
reduction to cost of goods sold in the third quarter of 2003.

5.    Financing Expense

2003

2002

2001Interest income

$
144

$
155

$
164Financing expense


(975
)

(422
)

(567
)Foreign exchange (loss) gain


(701
)

(13
)

378$
(1,532
)
$
(280
)
$
(25
)


F-10

---



6.    Income Taxes

2003

2002

2001The components of income tax expense are as follows:Current

$
932

$
1,144

$
1,254Deferred


(58
)

(1,298
)

1,795$
874

$
(154
)
$
3,049


The
reported income tax expense differs from the expected amount calculated by applying the Company's Canadian combined federal and provincial tax rate to income before income tax
expense. The reasons for this difference and the related tax effects are as follows:

2003

2002

2001Income before income taxes from continuing operations

$
5,154

$
2,614

$
1,748Canadian combined federal and provincial tax rate


34.0
%

36.4
%

37.5
%Expected income tax expense

$
1,753

$
951

$
656Increase (decrease) resulting from:Foreign tax rate differences





(90
)

(191
)Effects on deferred income taxes from reduction in Canadian income tax rates





178


3,300Recovery of prior years' U.S. taxes





(418
)

Unrecognized income tax benefit of losses


(732
)

(658
)

(870
)Goodwill and other amortization


281


253


286Investment tax credits


(343
)

(495
)

(283
)Other


(85
)

125


151$
874

$
(154
)
$
3,049


Deferred income tax assets have been provided as follows:

2003

2002Loss carryforwards and investment tax credits

$
11,436

$
7,007Expenses not currently deductible for tax purposes


344


328Deferred revenue


2,202


3,028Tax value of property, plant and equipment in excess of net book value


1,636


859Tax value of intangible assets in excess of net book value


582


4,545Total deferred tax assets


16,200


15,767Valuation allowance


(4,001
)

(2,159
)Net deferred tax assets

$
12,199

$
13,608Deferred income tax assets are classified as follows:Current

$
2,806

$
990Non-current


9,393


12,618$
12,199

$
13,608


At
December 31, 2003, the Company has accumulated tax losses of $24,267 available for federal and provincial purposes in Canada, which expire from 2004 to 2010. The Company also
has $1,325 of

F-11

---



unclaimed
Canadian investment tax credits, which expire from 2004 to 2013. These losses and investment tax credits can be used to offset future years' taxable income.

The
Company has accumulated tax losses of $6,283 for federal and state purposes in the U.S., which expire from 2010 to 2014. Subject to certain limitations, these losses can be used to
offset future years' taxable income.

7.    Discontinued Operations

In 2001, the Company adopted a formal plan to dispose of its Canadian sales and marketing division ("DRAXIS Pharmaceutica").

Pursuant
to APB No. 30, "Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," the results of operations of DRAXIS Pharmaceutica have been reported as discontinued operations and the consolidated financial statements and notes thereto for the
year ended December 31, 2001, and all subsequent periods presented have been reclassified.

On
March 31, 2003, the Company amended its License, Distribution and Supply Agreement with Elan Corporation, plc ("Elan") to return the Canadian rights for several of Elan's
neurology products in exchange for a cash payment of $6,500 and realized an after tax gain of $4,286 on this transaction.

On
July 22, 2003, the Company completed the divestiture of DRAXIS Pharmaceutica with the sale to Shire of substantially all remaining products of the division. The Company has
received $9,600 in cash from Shire and could receive up to $2,900 in market driven milestones over the next several years. The Company realized an after tax gain of $4,054, net of transaction and
related charges. In addition, the Company will receive royalty payments based on the continuing Canadian sales of the products. The Company also received the value of acquired inventories and Shire is
now responsible for all financial provisions of the license agreement related toPermax®.

Commencing
in the second quarter of 2002, the Company resolved to retain ownership of the Canadian rights toAlertec® and
continue to market and sellAlertec® in Canada
itself. Accordingly, discontinued operations did not include revenues and expenses directly attributable toAlertec® up until such time that
third party approval was obtained. As a result of the ability to obtain third party approval upon closing with Shire, management decided to dispose of Alertec® through the sale of the Canadian
rights to Shire and at that time included Alertec®as part of discontinued operations on a prospective basis.

Interest
expense directly attributable to license obligations included in the transaction has been allocated to the discontinued operations.

The
results of discontinued operations, presented in the accompanying Consolidated Statements of Operations, were as follows:

2003

2002

2001Revenues

$
4,301

$
6,844

$
6,180Operating income (loss) from discontinued operationsnet of tax

$
191

$
(834
)
$
(569
)Net gain on disposal of product rightsnet of tax


8,340





Net income (loss) from discontinued operationsnet of tax

$
8,531

$
(834
)
$
(569
)


F-12

---



8.    Earnings (Loss) per Share

Basic income (loss) per common share is calculated by dividing the net income (loss) by the weighted average number of the Company's common shares outstanding
during the period. Diluted income (loss) per common share is calculated by dividing the net income (loss) by the sum of the weighted average number of common shares that would have been outstanding if
potentially dilutive common shares had been issued during the period. The treasury stock method is used to compute the dilutive effect of warrants, stock options and the Employee Participation Share
Purchase Plan. The calculation of diluted income (loss) per common share excludes any potential conversion of warrants, options and Participation Shares that would increase earnings per share or
decrease a loss per share.

The
following table sets forth the computation of basic and diluted income (loss) per share for the years ended December 31:

2003

2002

2001Numerator:Net income (loss) from continuing operations

$
4,671

$
3,020

$
(1,015
)Net income (loss) from discontinued operations


8,531


(834
)

(569
)Net income (loss)

$
13,202

$
2,186

$
(1,584
)Denominator:Weighted average number of common shares outstandingbasic


37,114,648


36,981,985


36,587,794Weighted average effect of dilutive securities:Warrants





32,305


23,133Stock option plan


80,346


295,866


Employee Participation Share Purchase Plan





27,723


Weighted average number of common shares outstandingdiluted


37,194,994


37,337,879


36,610,927Basic income (loss) per share:From continuing operations

$
0.13

$
0.08

$
(0.03
)From discontinued operations


0.23


(0.02
)

(0.02
)$
0.36

$
0.06

$
(0.05
)Diluted income (loss) per share:From continuing operations

$
0.13

$
0.08

$
(0.03
)From discontinued operations


0.23


(0.02
)

(0.02
)$
0.36

$
0.06

$
(0.05
)


9.    Restricted Cash

In conjunction with the divestiture of DRAXIS Pharmaceutica to Shire (see Note 7), $976 of the cash proceeds are held in trust under an escrow agreement.
The release of this amount under escrow is dependent upon whether or not claims by Shire have been made to the Company by certain dates with respect to any breach of the representations and warranties
made by the Company to Shire or any failure of the Company to perform its obligations under the divestiture agreement.

F-13

---



10.    Accounts Receivable

2003

2002Trade

$
9,957

$
7,671Allowance for doubtful accounts


(266
)

(154
)Loans to employees


120


262Income taxes


87


155$
9,898

$
7,934


11.    Inventories

2003

2002Raw materials

$
3,440

$
2,865Work-in-process


1,541


1,024Finished goods


1,115


2,245$
6,096

$
6,134


12.    Property, Plant and Equipment

2003

2002Land

$
2,128

$
1,747Building


13,995


11,484Equipment


19,435


13,206Assets under construction


7,511


5,83643,069


32,273Accumulated depreciation


(10,152
)

(6,219
)$
32,917

$
26,054


Depreciation
of property, plant and equipment from continuing operations was $2,177, $1,750, and $1,240, for the years ended December 31, 2003, 2002 and 2001, respectively.

13.    Goodwill

2003

2002Goodwill

$
1,232

$
1,011Accumulated amortization


(555
)

(455
)$
677

$
556


Amortization
of goodwill from continuing operations was $Nil, $Nil, and $103, for the years ended December 31, 2003, 2002 and 2001, respectively.

Effective
with the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002, goodwill is no longer subject to amortization over its estimated
useful life (see Note 3 under "Accounting Changes"). Goodwill is subject to at least an annual assessment of impairment by applying a fair-value-based test. On December 31,
2003, the Company completed its annual assessment

F-14

---



for
goodwill impairment using the discounted cash flow model and has determined that goodwill is not impaired.

14.    Intangible Assets

2003Cost

Accumulated
Amortization

Net Book
ValuePatents and trademarks

$
411

$
267

$
144Licenses


8,797


7,058


1,739Other


193


102


91$
9,401

$
7,427

$
1,974


2002Cost

Accumulated
Amortization

Net Book
ValuePatents and trademarks

$
337

$
185

$
152Licenses


18,427


10,938


7,489Other


159


76


83$
18,923

$
11,199

$
7,724


Amortization
of intangible assets from continuing operations was $1,110, $1,054, and $1,093, for the years ended December 31, 2003, 2002 and 2001, respectively.

On
December 31, 2003, the Company completed its assessment for intangible assets impairment and has determined that intangible assets are not impaired.

15.    Bank Indebtedness

The
Company's short-term credit facilities as well as their interest rates were as follows:

December 31, 2003

Committed

Amount Drawn

Available

Period-end RateCredit Facility:(a) DRAXIS Health Inc.

$
1,159

$
Nil

$
1,159

5.5
%


December 31, 2002

Committed

Amount Drawn

Available

Period-end RateCredit Facilities:(a) DRAXIS Health Inc.

$
951

$
Nil

$
951

$
5.5
%(b) DRAXIS Pharma Inc.


2,220


884


1,336


5.5
%$
3,171

$
884

$
2,287


---

F-15

---





16.    Accounts Payable and Accrued Liabilities

2003

2002Trade

$
3,617

$
4,261Accrued liabilities


1,556


1,808Employee related items


1,535


1,894Income taxes





868Other





358$
6,708

$
9,189


17.    Deferred Revenues

2003

2002(a)BrachySeed®

$


$
1,767(b) SpectroPharm product line


9,452


7,760(c)Anipryl®


29,893


29,89239,345


39,419Less: accumulated amortization


26,443


20,42512,902


18,994Less: current portion


5,309


5,142$
7,593

$
13,852


Amortization
of deferred revenues totalled $6,811, $6,568 and $4,783 for the years ended December 31, 2003, 2002, and 2001, respectively.



In
September 2000, the Company entered into a 10 year arrangement with Cytogen Corporation ("Cytogen") whereby Cytogen was granted an exclusive license to market, sell and
distribute the Company'sBrachySeed® implant for the treatment of prostate cancer in the United States in exchange for
non-refundable fees, royalties based on Cytogen's sales ofBrachySeed® and a supply agreement. Under the arrangement, the
Company was entitled to receive up to $2,000 in non-refundable fees upon achievement of specified milestones of which $Nil was received in 2003 (2002$1,000;
2001$500). Non-refundable fees received from Cytogen were deferred and recognized as revenue on a straight-line basis over the period to December 31, 2010.

In
January 2003, the Company's agreements with itsBrachySeed® licensee in the U.S. were effectively terminated with no
further transactions taking place under the agreements. A formal agreement was subsequently reached with its licensee for terminating both the License and Distribution Agreement and Product
Manufacturing and Supply Agreement forBrachySeed® implants in the U.S. As a result of the termination of the agreements, the unamortized
portion of the non-refundable milestone payments of $1,436 was included in income as royalty and licensing revenue.

F-16

---





In May 2000, the Company entered an arrangement with Block Drug Company (Canada) Limited, now part of GlaxoSmithKline Consumer Healthcare ("GSK") with
respect to the Company's SpectroPharm line of dermatology products which included the sale of product rights to GSK in exchange for a non-refundable fee, the acquisition of inventory on
hand, a supply agreement and a technical services arrangement. As a result of the Company's ongoing obligations to GSK pursuant to this arrangement, the $8,169 of net proceeds from the sale of the
product rights have been deferred and are being recognized as revenue on a straight-line basis over the period to January 31, 2005.



In
December 1997, the Company entered into an alliance with Pfizer Inc. ("Pfizer"), whereby Pfizer was granted a perpetual exclusive license to market, sell and distribute Anipryl® in
exchange for non-refundable fees, royalties based on the worldwide sales of Anipryl®, a manufacturing and supply agreement and a research collaboration.

In
December 1999, the Company and Pfizer amended the terms of the alliance (the "First Amendment"), whereby $9,000 of potential additional non-refundable fees were
eliminated in exchange for the Company receiving additional regulatory support for a potential new indication and additional manufacturing data. These potential additional non-refundable
fees would have become payable if Pfizer had exercised its right to acquire product registrations following regulatory approval ofAnipryl®
in designated European countries.

In
December 2001, the Company and Pfizer further amended the terms of the alliance (the "Second Amendment") whereby the Company received a payment of $3,150 in respect of minimum
royalty entitlements for the second and third three-year periods ending December 31, 2001 and 2002 and modifications to future royalty entitlements. The Second Amendment also
resulted in all rights toAnipryl® outside of North America reverting back to the Company, forfeiture of any additional minimum royalty
entitlements and the termination of any future collaborative research on new indications or formulations forAnipryl®.

Under
the amended arrangement, the Company will not be entitled to receive any additional non-refundable fees. The $28,090 in non-refundable fees already received
from Pfizer have been deferred and are being recognized as revenue on a straight-line basis over the period to December 31, 2006.

The
portion of the $3,150 payment allocated to the modifications of future royalty entitlements has been deferred and is being recognized as revenue on a straight-line basis
over the period to December 31, 2013.

The
portion of the $3,150 payment referable to the minimum royalty entitlement for the three-year period ending December 31, 2001 was recognized as revenue in the
fourth quarter of 2001. The portion referable to the third three-year period ending December 31, 2002 was deferred and recognized as revenue on a straight-line basis
over the four quarters of 2002.

F-17

---



18.    Long-Term Debt

2003

2002DRAXIS Pharma Inc.Term bank loan repayable in 120 equal monthly installments to August, 2009. Secured by the assets of DPI and bearing interest at Canadian prime plus 1.0%

$
5,559

$
5,167Term government loan drawn against eligible capital expenditures to a maximum of $3,708 and repayable in 16 equal quarterly installments commencing April, 2004. Secured by specified assets of DPI and bearing interest at Canadian prime plus
2.5%


1,742


1,081Loan from minority interest repayable in full on March, 2007 or earlier if certain conditions are met. Secured by the asset of DPI and bearing interest at Canadian prime plus 1.5%


3,165


1,975DRAXIS Health Inc.Term bank loan, repaid during 2003





2,220Unsecured obligation, repaid during 2003





2,28310,466


12,726Less: current portion


981


2,158$
9,485

$
10,568


As
of December 31, 2003, the Company had met the financial covenants pursuant to the term bank loan.

The
annual aggregate amounts of maturities on long-term debt for the next five years are as follows:

2004

$
9812005


1,4162006


1,4162007


4,582Thereafter


2,071$
10,466


Interest
expense on long-term debt from continuing operations totalled $958, $367, and $398 for the years ended December 31, 2003, 2002, and 2001, respectively.

The
fair value of the long-term debt is considered to be equivalent to its carrying value based upon consideration of borrowings with similar credit ratings and maturities.

19.    Minority Interest

During 2003, the Company's wholly owned subsidiary, DPI, issued 367,589 (2002-1,018,809) common shares to Société
générale de financement du Québec ("SGF") and members of DPI's management team in exchange for net proceeds of $365 (2002-$969). These
issuances were based on the pro-rata shareholdings of DPI prior to the issuance and accordingly there was no change in the Company's effective interest in DPI.

F-18

---



Furthermore
in 2003, DPI repurchased and cancelled 171,452 outstanding shares of DPI held by members of DPI's management team in exchange for cash and settlement of existing loans to
those employees.

During
2002, DPI repurchased and cancelled 277,778 outstanding shares of DPI held by a former employee of DPI in exchange for cash and settlement of an existing loan to the employee
related to the original issuance of those shares.

20.    Shareholders' Equity



On November 8, 1999, in connection with the engagement of a financial advisor, the Company issued a non-assignable warrant to purchase 125,000
shares at $1.65 per share on or before November 8, 2002. Included as a component of shareholders' equity and deferred financing charges was $74, which represented the fair value of the above
warrant. The fair value of the warrant was estimated
at the date of issue using the Black-Scholes option-pricing model with the following assumptions: share price at date of issue of $1.375, dividend yield of 0%, expected volatility of 65%,
risk-free rate of 5.8%, and expected life of three years. As these warrants expired unexercised in 2002, the value of the expired warrants was accounted as additional paid-in
capital.

In
aggregate, there were no warrants (2002-Nil; 2001-125,000) to purchase common shares at December 31, 2003.



The Board of Directors has adopted a stock option plan in order to provide an incentive for directors, officers and employees. The plan provides that the Board of
Directors may, from time to time, at its discretion, grant to directors, officers and employees the option to purchase common shares. The Board of Directors will determine the price per common share
and the number of common shares which may be allotted to each designated director, officer or employee and all other terms and conditions of the option in accordance with the applicable requirements
of any relevant regulatory authority or stock exchange. These options will be exercisable for a period not exceeding 10 years from the date of the grant and generally options vest one third on
each of the first, second and third anniversaries of grant.

On
June 20, 2001, the Board of Directors received shareholder approval to increase the maximum number of options for issuance under the stock option plan from 5,500,000 to
7,500,000.

The
Board of Directors has adopted a guideline limiting the aggregate number of common shares that can be issued at any point in time, either through the exercise of options or the
conversion of Employee Participation Shares, to 13% of the Company's outstanding common shares. As at December 31, 2003 the aggregate number of shares issuable pursuant to outstanding options
and Employee Participation Shares represented 8.4% (2002-8.9%) of the outstanding common shares.

F-19

---



The
following is a summary of the maximum number of common shares issuable pursuant to outstanding stock options and available for future issuance:

|                                    |                       | 2003      |          | Outstanding
2002 |          | 2001      |          | Available
For
Issuance
2003 |         
|----------------------------------- | --------------------- | --------- | -------- | ---------------- | -------- | --------- | -------- | --------------------------- | --------
|Balance, beginning of year          |                       | 3,314,109 |          | 3,358,444        |          | 3,079,527 |          | 1,466,528                   |         
|Increase (decrease) resulting from: |                       |           |          |                  |          |           |          |                             |         
|                                    | Approved for issuance |           |         |                  |         |           |         |                             |        
|                                    | Granted               |           | 775,000  |                  | 750,000  |           | 581,500  |                             | (775,000
|                                    | Exercised             |           | (240,334 | )                | (468,168 | )         | (48,332  | )                           |        
|                                    | Cancelled             |           | (255,000 | )                | (150,167 | )         | (63,001  | )                           | 255,000 
|                                    | Expired               |           | (495,833 | )                | (176,000 | )         | (191,250 | )                           | 495,833 
|                                    |                       |           |          |                  |          |           |          |                             |         
|Balance, end of year                |                       | 3,097,942 |          | 3,314,109        |          | 3,358,444 |          | 1,442,361                   |         
|                                    |                       |           |          |                  |          |           |          |                             |         
|Exercisable (vested), end of year   |                       | 1,911,331 |          | 2,102,610        |          | 2,365,654 |          |                             |         
|                                    |                       |           |          |                  |          |           |          |                             |         

|                                            |                          | 2003 |                  | 2002 |                  | 2001 |                  | 
|------------------------------------------- | ------------------------ | ---- | ---------------- | ---- | ---------------- | ---- | ---------------- | 
|Weighted average exercise price of options: |                          |      |                  |      |                  |      |                  | 
|                                            | Outstanding, end of year |      | CDN$3.25         |      | CDN$3.60         |      | CDN$3.42         | 
|                                            | Exercisable, end of year |      | CDN$3.39         |      | CDN$3.60         |      | CDN$3.49         | 
|                                            | Granted                  |      | CDN$2.42         |      | CDN$3.86         |      | CDN$3.44         | 
|                                            | Exercised                |      | CDN$3.23         |      | CDN$2.78         |      | CDN$2.64         | 
|                                            | Cancelled and expired    |      | CDN$3.28         |      | CDN$3.49         |      | CDN$3.44         | 
|Range of exercise price of options:         |                          |      |                  |      |                  |      |                  | 
|                                            | Granted                  |      | CDN$2.29 - $3.25 |      | CDN$2.50 - $5.41 |      | CDN$2.91 - $3.60 | 
|                                            | Exercised                |      | CDN$1.63 - $3.66 |      | CDN$2.55 - $4.29 |      | CDN$2.55 - $3.05 | 
|                                            | Cancelled and expired    |      | CDN$2.32 - $3.91 |      | CDN$2.55 - $4.42 |      | CDN$2.94 - $3.95 | 
|                                            |                          |      |                  |      |                  |      |                  | 

The
following table summarizes information about stock options outstanding at December 31, 2003:

|                 |  | Options Outstanding |  | Options Exercisable
(Vested)
|---------------- |  | ------------------- |  | ----------------------------
|
|CDN$1.63 - $2.00 |  | 93,743              |  | 0.83                        
|CDN$2.01 - $2.50 |  | 737,250             |  | 6.17                        
|CDN$2.51 - $3.00 |  | 181,666             |  | 5.15                        
|CDN$3.01 - $3.50 |  | 816,033             |  | 1.97                        
|CDN$3.51 - $4.00 |  | 889,250             |  | 2.88                        
|CDN$4.01 - $4.50 |  | 335,000             |  | 2.79                        
|CDN$4.51 - $5.41 |  | 45,000              |  | 3.35                        
|                 |  |                     |  |                             
|                 |  | 3,097,942           |  | 3.49                        
|                 |  |                     |  |                             

F-20

---





On February 16, 1995, the Company established the Employee Participation Share Purchase Plan for the directors, officers and employees of the Company to
tie employee compensation more closely to shareholder value. The Employee Participation Share Purchase Plan was approved by the shareholders on June 16, 1995. The Board of Directors has
provided that it would be a condition to receiving any benefit from the Employee Participation Share Purchase Plan that the share price have appreciated at least 25% from the date of issuance of any
Participation Shares. The maximum number of Participation Shares issuable pursuant to the Employee Participation Share Purchase Plan is 2,000,000. No further participation shares will be issued by the
Company.

Vesting
takes place over a four year period at the rate of 20%, 20%, 20% and 40% commencing on the first anniversary of the issuance of the Participation Shares and for each of the three
years thereafter, with the exception of 500,000 Participation Shares held by an officer of the Company, which vest at the rate of 10%, 20%, 30% and 40%. Vested Participation Shares are automatically
convertible into shares of the Company at the election of the holder, provided that the shares have increased in value since the date of issuance of the vested Participation Shares by the
aforementioned 25%. The number of common shares a Participant will receive when converting Participation Shares is determined by multiplying the number of Participation Shares held by a Participant by
a fraction whose numerator is the amount by which the fair market value of a common share at the date of conversion exceeds the fair market value of a common share as at the date on which the
Participation Shares were issued, and whose denominator is the fair market value of the common shares at the date of conversion. For purposes of the Employee Participation Share Purchase Plan, the
fair market value of common shares at a particular time means the average of the daily high and low board lot trading prices on each of the five trading days on the Toronto Stock Exchange immediately
preceding the valuation date.



On February 16, 1995, the Board of Directors of the Company authorized the issuance of 975,000 Series A Participation Shares at a subscription price
of CDN$0.30 each. The average of the daily high and low board lot trading prices on each of the five trading days on the Toronto Stock Exchange immediately preceding the issuance of the
Series A Participation Shares was CDN$2.45. As at December 31, 2000 all Series A Participation Shares had been either converted into common shares or cancelled by the Company.



On December 18, 1995, the Board of Directors of the Company authorized the issuance of 555,000 Series B Participation Shares at a subscription price
of CDN$0.30 each. The average of the daily high and low board lot trading prices on each of the five trading days on the Toronto Stock Exchange immediately preceding the issuance of the
Series B Participation Shares was CDN$2.25. As at December 31, 2000 all Series B Participation Shares had been either converted into common shares or cancelled by the Company.



On May 12, 1999, the Board of Directors of the Company authorized the issuance of 470,000 Series C Participation Shares at a subscription price of
CDN$0.50 each. The average of the daily high and low board lot trading prices on each of the five trading days on the Toronto Stock Exchange immediately preceding the issuance of the Series C
Participation Shares was CDN$3.24.

All
outstanding Participation Shares have been issued and paid for by the employees through the issuance of a limited recourse promissory note and are secured against the shares.

F-21

---



Information
pertaining to Participation Shares for the years ended December 31, 2003, 2002 and 2001 is set forth in the following table:

2003

2002

2001Outstanding, beginning of year

395,000

470,000

470,000Granted





Exercised

(75,000
)
(75,000
)
Cancelled

(75,000
)


Expired





Outstanding, end of year

245,000

395,000

470,000Exercisable (vested), end of year

245,000

207,000

188,000




The Company has adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-based Compensation," and as permitted under SFAS No. 123,
applies APB No. 25 and related interpretations in accounting for its plan. SFAS No. 123 requires disclosure of pro forma amounts to reflect the impact if the Company had elected to adopt
the optional recognition provisions of SFAS No. 123 for its stock option plans. Accordingly, the Company's net income (loss) applicable to common shares and income (loss) per common share would
have been changed by the pro forma amounts as indicated below:

2003

2002

2001Net income (loss), as reported

$
13,202

$
2,186

$
(1,584
)Pro forma impact


(681
)

(736
)
$
(399
)Pro formanet income (loss)

$
12,521

$
1,450

$
(1,983
)Basic net income (loss) per share, as reported

$
0.356

$
0.058

$
(0.044
)Pro formaimpact per share

$
(0.019
)
$
(0.020
)
$
(0.011
)Pro formanet income (loss) per share (Basic)

$
0.337

$
0.038

$
(0.055
)Pro formanet income (loss) per share (Diluted)

$
0.337

$
0.038

$
(0.055
)


The
fair value of stock options used to compute pro forma net income (loss) applicable to common shares and loss per common share disclosures is the estimated fair value at grant date
using the Black-Scholes option-pricing model with the following assumptions as at December 31:

2003

2002

2001Dividend yield

0.0
%
0.0
%
0.0
%Expected volatility

60-62
%
62%-64
%
63%-66
%Risk-free interest rate

3.8%-4.1
%
4.1%-5.6
%
5.2%-5.6
%Expected option life

5-10 yrs

5 yrs

5 yrs


The
Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable and which
significantly differ from the Company's stock option awards. In addition, option-pricing models require the input of highly subjective assumptions including the expected price volatility. The Company
uses expected volatility rates, which are based on historical volatility rates trended into future years. Changes in the subjective input assumptions can materially affect the fair value estimate, and
therefore the existing model does not necessarily provide a reliable single measure of the fair value of the Company's stock options.



During 2003, under the stock repurchase program, the Company repurchased 50,300 shares (2002-Nil; 2001-Nil) for cancellation at an average
price of $1.30 per share (2002-$Nil; 2001-$ Nil) for total consideration of $65 (2002-$Nil; 2001-$Nil). The excess of $5 (2002-$Nil;
2001-$Nil) below the stated capital of the acquired shares was charged to additional paid-in capital. The most recent issuer bid commenced on April 21, 2003 and
terminates on April 20, 2004.

F-22

---



21.    Segmented Information and Major Customers

Industry Segmentation

For
purposes of operating decision-making and assessing performance, management considers that it operates in three segments: Radiopharmaceuticals, Manufacturing, and Corporate and
Other. Executive management assesses the performance of each segment based on segment income before financing expense, income taxes and minority interest. The accounting policies used to determine
segmented results and measure segmented assets are the same as those described in the summary of significant accounting policies.

|                               |  | 2003 |        | 2002 |   | 2001   |  
|------------------------------ |  | ---- | ------ | ---- | - | ------ | -
|PRODUCT SALES REVENUES         |  |      |        |      |   |        |  
|Radiopharmaceuticals           |  | $    | 14,564 |      | $ | 9,704  |  
|Manufacturing                  |  |      | 26,985 |      |   | 20,946 |  
|Corporate and Other            |  |      | (1,014 | )    |   | (312   | )
|                               |  |      |        |      |   |        |  
|                               |  | $    | 40,535 |      | $ | 30,338 |  
|                               |  |      |        |      |   |        |  
|ROYALTY AND LICENSING REVENUES |  |      |        |      |   |        |  
|Radiopharmaceuticals           |  | $    | 1,521  |      | $ | 451    |  
|Manufacturing                  |  |      |       |      |   |       |  
|Corporate and Other            |  |      | 7,137  |      |   | 7,851  |  
|                               |  |      |        |      |   |        |  
|                               |  | $    | 8,658  |      | $ | 8,302  |  
|                               |  |      |        |      |   |        |  
|TOTAL REVENUES                 |  |      |        |      |   |        |  
|Radiopharmaceuticals           |  | $    | 16,085 |      | $ | 10,155 |  
|Manufacturing                  |  |      | 26,985 |      |   | 20,946 |  
|Corporate and Other            |  |      | 6,123  |      |   | 7,539  |  
|                               |  |      |        |      |   |        |  
|                               |  | $    | 49,193 |      | $ | 38,640 |  
|                               |  |      |        |      |   |        |  
|SEGMENT INCOME(1)              |  |      |        |      |   |        |  
|Radiopharmaceuticals           |  | $    | 5,614  |      | $ | 706    |  
|Manufacturing                  |  |      | 1,084  |      |   | 627    |  
|Corporate and Other            |  |      | 3,275  |      |   | 4,365  |  
|                               |  |      |        |      |   |        |  
|                               |  | $    | 9,973  |      | $ | 5,698  |  
|                               |  |      |        |      |   |        |  
|DEPRECIATION AND AMORTIZATION  |  |      |        |      |   |        |  
|Radiopharmaceuticals           |  | $    | 843    |      | $ | 716    |  
|Manufacturing                  |  |      | 1,448  |      |   | 1,166  |  
|Corporate and Other            |  |      | 996    |      |   | 922    |  
|                               |  |      |        |      |   |        |  
|                               |  | $    | 3,287  |      | $ | 2,804  |  
|                               |  |      |        |      |   |        |  
|OPERATING INCOME (LOSS)(2)     |  |      |        |      |   |        |  
|Radiopharmaceuticals           |  | $    | 4,771  |      | $ | (10    | )
|Manufacturing                  |  |      | (364   | )    |   | (539   | )
|Corporate and Other            |  |      | 2,279  |      |   | 3,443  |  
|                               |  |      |        |      |   |        |  
|                               |  | $    | 6,686  |      | $ | 2,894  |  
|                               |  |      |        |      |   |        |  
|IDENTIFIABLE ASSETS            |  |      |        |      |   |        |  
|Radiopharmaceuticals           |  | $    | 11,424 |      | $ | 10,823 |  
|Manufacturing                  |  |      | 40,953 |      |   | 30,701 |  
|Corporate and Other            |  |      | 24,176 |      |   | 26,427 |  
|                               |  |      |        |      |   |        |  
|                               |  | $    | 76,553 |      | $ | 67,951 |  
|                               |  |      |        |      |   |        |  

---

F-23

---



|                        |  | 2003 |        | 2002 |   | 2001  
|----------------------- |  | ---- | ------ | ---- | - | ------
|Geographic Segmentation |  |      |        |      |   |       
|REVENUES(3)             |  |      |        |      |   |       
|Canada                  |  | $    | 22,755 |      | $ | 23,205
|United States           |  |      | 26,031 |      |   | 15,246
|Other                   |  |      | 407    |      |   | 189   
|                        |  |      |        |      |   |       
|                        |  | $    | 49,193 |      | $ | 38,640
|                        |  |      |        |      |   |       
|LONG-LIVED ASSETS(4)    |  |      |        |      |   |       
|Canada                  |  | $    | 35,568 |      | $ | 34,334
|United States           |  |      |       |      |   |      
|                        |  |      |        |      |   |       
|                        |  | $    | 35,568 |      | $ | 34,334
|                        |  |      |        |      |   |       

---

|                                               |  | 2003 |       | 2002 |   | 2001 
|---------------------------------------------- |  | ---- | ----- | ---- | - | -----
|Expenditures for Property, Plant and Equipment |  |      |       |      |   |      
|Radiopharmaceuticals                           |  | $    | 383   |      | $ | 471  
|Manufacturing                                  |  |      | 3,138 |      |   | 5,128
|Corporate and Other                            |  |      | 15    |      |   | (209 
|                                               |  |      |       |      |   |      
|                                               |  | $    | 3,536 |      | $ | 5,390
|                                               |  |      |       |      |   |      



The major customers disclosed in this table are included in the Manufacturing segment results.

Percentage of Total Revenue2003

2002

2001Customer A

11
%
19
%
23
%Customer B

15

17

18Customer C

15



41
%
36
%
41
%


F-24

---



22.    Commitments and Contingencies



The operating leases relate to the rental of office space, office equipment and some ancillary lab and production related equipment.

The
Company is committed under operating leases requiring minimum annual lease payments as follows:

2004

$
2752005


2052006


1582007


Thereafter


$
638




Coincident with DPI's issuance of shares in 2000, the Company entered into a shareholders' agreement which was subsequently amended on March 28, 2002
granting SGF the right to obligate the Company to purchase its shareholdings in DPI anytime after February 18, 2005. The price to be paid is based on the fair market value of DPI at the time of
exercise. Subject to certain conditions, at the Company's option, up to 40% of the SGF purchase consideration may be made in the form of the Company's common shares.



The Company is obligated to make certain royalty payments based on related product sales and milestone payments based on the achievement of certain specified
events.

Legal
Proceedings

From
time to time, the Company becomes involved in legal proceedings and claims which arise in the ordinary course of business.

The
Company considers that the ultimate liability with respect to any known actions will not materially affect the business, financial position, results of operations or cash flows of
the Company.

Since
2000, the Company and its animal health subsidiary, Deprenyl Animal Health Inc. ("DAHI"), had been involved in U.S. and Canadian legal proceedings with the University of
Toronto and the University of Toronto Innovations Foundation. One dispute related to the terms of a 1992 license agreement under which Innovations Foundation was claiming entitlement to a portion of
the consideration earned by DAHI with respect toAnipryl®. The second dispute related to a 1988 contract research agreement under which the
University of Toronto was claiming a declaration of ownership and an order for assignment of patents and damages related to certain Anipryl®-related intellectual property. On November 18, 2003,
the Company, and the University of Toronto and the University of
Toronto Innovations Foundation mutually agreed to dismiss, without payment, the lawsuits between them with respect toAnipryl®.

F-25

---



23.    Related Party Transactions

Significant transactions not otherwise disclosed in the accompanying financial statements were as follows:

2003

2002

2001Net contribution from the sales of a product by a company which is a shareholder included in loss from discontinued operations (total revenues: 2003$428; 2002$784; 2001$856)

$
111

$
192

$
176Rent paid to a company jointly controlled by a member of the Board of Directors included in selling, general and administration expenses

$
130

$
125

$
116


The
aforementioned transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the
related parties.

24.    Financial Instruments



The fair values of cash, accounts receivable, accounts payable and accrued charges are equivalent to their carrying values because of the short-term
maturity of those instruments. The fair value of long-term investments is determined based on quoted market prices. The Company is not party to any derivative instruments.



The Company is subject to credit risk through trade receivables and short-term cash investments. Credit risk with respect to trade receivables is
limited given the creditworthiness of the counterparties. The Company invests its excess liquidity in high quality government securities and short-term commercial paper, bank deposits and
money market mutual funds which are invested in high quality short-term securities.



The Company's foreign exchange exposure for accounting purposes mainly relates to the U.S. denominated monetary assets of the Canadian operations of the Company.
Changes in the exchange rate may result in a decrease or increase in the foreign exchange gain or loss. The Company does not actively hedge this exposure but reduces the exposure by maintaining the
minimum level of U.S. denominated cash available to meet its short-term cash requirements.

25.    Subsequent Events

On March 31, 2004, DRAXIS entered into an agreement with a syndicate of underwriters pursuant to which the underwriters have agreed to purchase, on a
bought deal basis, 3,053,436 units of the Company at a purchase price of $5.00 per unit, for aggregate gross proceeds of $15,289. DRAXIS has granted the underwriters an over-allotment
option to purchase up to an additional 458,016 units, exercisable at the issue price any time up to 30 days following closing of the offering, representing additional gross proceeds of up to
$2,293. Each unit will consist of one common share of DRAXIS and one-half of one share purchase warrant. Each whole warrant will entitle the holder to acquire one common share of the
Company at a price of $6.50 at any time prior to two years from the date of closing of the offering.

F-26

---



On
March 31, 2004, DRAXIS entered into a binding letter of intent with SGF to acquire its 32.7% interest in DPI. The purchase price is cash consideration of $9,938. DRAXIS will
use the proceeds from the offering to pay for the acquisition and to repay approximately $4,587 in debt owed by DPI.

26.    Recent Pronouncements

In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No. 150, "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity." This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities
and equity that are entered into or modified after May 31, 2003. The adoption of this statement had no effect on our financial condition or results of operations since the Company currently
does not have financial instruments that meet such criteria.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies financial
accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as "derivates") and for hedging activities under
FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for contracts entered into or modified after June 30, 2003. The
adoption of this statement had no effect on our financial condition or results of operations since the Company is not party to any derivative instruments.

In
January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," which was revised in December 2003.
Application of FIN 46 is required in financial statements of public entities that have interests in variable interest entities for periods ending after December 15, 2003. Application by public
entities for all other types of entities is required in financial statements for periods ending after March 15, 2004. The adoption of this statement will have no effect on our financial
condition or results of operations since the Company currently does not have any financial interests in variable interest entities.

27.    Comparative Information

The Company has reclassified certain prior years' information to conform with the current presentation format.

F-27

---





PART II.

Item 13.    Defaults, Dividends Arrearages and Delinquencies

Not Applicable

Item 14.    Material Modifications to the Rights of Security Holders and Use of Proceeds

Not Applicable

Item 15.    Controls and Procedures

Not applicable

Item 16A.    Audit Committee Financial Expert

The Company's Board of Directors has determined that Mr. Rolf Henel, a member of the Company's Audit Committee, is a financial expert.

Item 16B.    Code of Ethics

In April 2004, the Company amended the existing Code of Ethics, which resulted in the establishment of a new Code of Ethics and Business Conduct in light
of its continued commitment to honesty and integrity in the conduct of its business. The Code of Ethics and Business Conduct applies to all its officers and employees, including its Chief Executive
Officer, its Chief Financial Officer, all employees of the Company's subsidiaries and all directors of the Company. The Code is available on the Company's website at www.draxis.com.

In
2004, DRAXIS amended its Code of Ethics and Business Conduct to bring it into compliance with current regulatory requirements and best practices and to eliminate references to matters
more appropriately covered in the Company's employee handbook. Specifically, the changes broaden DRAXIS's conflicts of interest policy, add provisions regarding the integrity of books and records and
compliance with sound accounting practices, expand the provisions covering the reporting of violations of the Code of Ethics and clarify responsibility for monitoring compliance with the Code of
Ethics.

Item 16C.    Principal Accountant Fees and Services

Audit Fees

The fees for all audit services performed by the Company's auditors for the Company and its subsidiaries for the years ended December 31, 2002 and
December 31, 2003, were CDN$154,000 and $158,000, respectively.

Audit-Related Fees

The aggregate fees billed for the years ended December 31, 2002 and December 31, 2003 for assurance and related service by the Company's principal
accountant that are reasonably related to the performance of the audit or review of the Company's financial statements were CDN$40,000 and $42,000, respectively. Services provided include review of
the notes to the Company's annual report to shareholders, management proxy circular, and this annual report on Form 20-F.

Tax Fees

The aggregate fees billed for the years ended December 31, 2002 and December 31,2003 for professional services rendered by the Company's principal
accountant for tax compliance, tax advice and tax planning were CDN$35,000 and $20,000, respectively.

99

---



All Other Fees

The aggregate fees billed for the years ended December 31, 2002 and December 31,2003 for products and services provided by the Company's principal
accountant, other than those described above, were CDN$161,350 and $57,400, respectively. The services provided included quarterly review and a special audit in connection with a loan from
Investissement Québec. In 2002, the services provided also included review of the registration statement filed in connection with the Company's secondary offering.

Item 16D.    Exemptions from the Listing Standards for Audit Committees

Not applicable.

Item 16E.    Purchases of Equity Securities by the Issuer and Affiliated Purchasers

ISSUER PURCHASES OF EQUITY SECURITIES

|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
|-------------- |  | ----------------------------------------------- |  | ------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------
|January 2003   |  | Nil                                             |  | Nil                                         |  | Nil                                                                                             |  | Nil                                                                                                                        
|February 2003  |  | Nil                                             |  | Nil                                         |  | Nil                                                                                             |  | Nil                                                                                                                        
|March 2003     |  | Nil                                             |  | Nil                                         |  | Nil                                                                                             |  | Nil                                                                                                                        
|April 2003     |  | 5,000                                           |  | $1.32                                       |  | 5,000                                                                                           |  | 1,849,934                                                                                                                  
|May 2003       |  | 45,300                                          |  | $1.30                                       |  | 50,300                                                                                          |  | 1,804,634                                                                                                                  
|June 2003      |  | Nil                                             |  | Nil                                         |  | 50,300                                                                                          |  | 1,804,634                                                                                                                  
|July 2003      |  | Nil                                             |  | Nil                                         |  | 50,300                                                                                          |  | 1,804,634                                                                                                                  
|August 2003    |  | Nil                                             |  | Nil                                         |  | 50,300                                                                                          |  | 1,804,634                                                                                                                  
|September 2003 |  | Nil                                             |  | Nil                                         |  | 50,300                                                                                          |  | 1,804,634                                                                                                                  
|October 2003   |  | Nil                                             |  | Nil                                         |  | 50,300                                                                                          |  | 1,804,634                                                                                                                  
|November 2003  |  | Nil                                             |  | Nil                                         |  | 50,300                                                                                          |  | 1,804,634                                                                                                                  
|December 2003  |  | Nil                                             |  | Nil                                         |  | 50,300                                                                                          |  | 1,804,634                                                                                                                  
|Total          |  | Nil                                             |  | Nil                                         |  | 50,300                                                                                          |  | 1,804,634                                                                                                                  

---

Item 17.    Financial Statements

Not Applicable

Item 18.    Financial Statements

| |  | The following financial statements are filed as part of this annual report on Form 20-F. |  |    
| |  | ---------------------------------------------------------------------------------------- |  | ---
| |  | Management's Report                                                                      |  | F-1
| |  | Report of Deloitte & Touche LLP                                                          |  | F-2
| |  | Consolidated statements of operations                                                    |  | F-3
| |  | Consolidated balance sheets                                                              |  | F-4
| |  | Consolidated statements of shareholders' equity                                          |  | F-5
| |  |                                                                                          |  |    

100

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| |  | Consolidated statements of cash flows          |  | F-6
| |  | ---------------------------------------------- |  | ---
| |  | Notes to the consolidated financial statements |  | F-7

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 on 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 on 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 on 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 on 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 on 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 on 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 on 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 on 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.                                                                                                                                                                                                                                                                                                                                                                                                                        
|4.8*        |  | Share Purchase Agreement dated July 16, 2003 between Mohammed Barkat and DRAXIS Pharma Inc.                                                                                                                                                                                                                                                                                                                                                                                                                        
|4.9*        |  | Share Purchase Agreement dated July 16, 2003 between Michel Sauvageau and DRAXIS Pharma Inc.                                                                                                                                                                                                                                                                                                                                                                                                                       
|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 on Form 20-F for the year ended December 31, 2000, filed on
June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

101

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|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 on 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.                                                                                                                                                                             
|4.13* |  | Asset Purchase Agreement dated July 22, 2003 between DRAXIS Health Inc. and Shire Biochem Inc.                                                                                                                                                                                                            
|4.14*  |  | Stock Option Plan of DRAXIS Health Inc., as amended, dated June 27, 2001                                                                                                                                                                                                                                  
|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 on 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 on 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 on 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 on 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 on 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 on 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 on 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 on 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                                                                                                                                                                                               
|4.24*  |  | Employment Agreement dated April 27, 2004 between DRAXIS Health Inc. and Dan Brazier                                                                                                                                                                                                                      
|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 on 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                                                                                                                                                                               
|4.27*  |  | Employment Agreement dated April 22, 2003 between DRAXIS PHARMA Inc. and John E.M. Durham                                                                                                                                                                                                                 
|4.28*  |  | Amendment dated March 26, 2004 to Employment Agreement dated April 22, 2003 between DRAXIS PHARMA Inc. and John E.M. Durham                                                                                                                                                                               
|       |  |                                                                                                                                                                                                                                                                                                           

102

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|4.29* |  | Employment Agreement dated October 17, 2003 between DRAXIS Health Inc. and Alida Gualtieri                                                                                                                                                               
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.30* |  | Amendment dated March 26, 2004 to Employment Agreement dated October 17, 2003 between DRAXIS Health Inc. and Alida Gualtieri                                                                                                                             
|4.31* |  | Employment Agreement dated March 9, 2004 between DRAXIS Health Inc. and Chien Huang                                                                                                                                                                      
|4.32* |  | Employment Agreement dated March 9, 2004 between DRAXIS Health Inc. and Mark Oleksiw                                                                                                                                                                     
|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 on 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                                                                                                                                  
|4.35* |  | Employment Agreement dated October 1, 1997 between DRAXIS Health Inc. and Dr. Richard J. Flanagan                                                                                                                                                        
|4.36* |  | Amendment dated July 23, 2001 to Employment Agreement dated October 1, 1997 between DRAXIS Health Inc. and Dr. Richard J. Flanagan                                                                                                                       
|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                                                                                                                                                                           

---

103

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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.

|                   |  | DRAXIS HEALTH INC.
|------------------ |  | ------------------
|Date: May 14, 2004 |  | By:               
|                   |  | By:               

104

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EXHIBIT INDEX  DRAXIS HEALTH INC.  Form 20-F Annual Report

|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1         |  | Articles of Amalgamation of DRAXIS Health Inc. (incorporated herein by reference to the Company's Annual Report on 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 on 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 on 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 on 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 on 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 on 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 on 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 on 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.                                                                                                                                                                                                                                                                                                                                                                                                                        
|4.8*        |  | Share Purchase Agreement dated July 16, 2003 between Mohammed Barkat and Draxis Pharma Inc.                                                                                                                                                                                                                                                                                                                                                                                                                        
|4.9*        |  | Share Purchase Agreement dated July 16, 2003 between Michel Sauvageau and DRAXIS Pharma Inc.                                                                                                                                                                                                                                                                                                                                                                                                                       
|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 on Form 20-F for the year ended December 31, 2000, filed on
June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                                 
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

105

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|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 on 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.                                                                                                                                                                             
|4.13* |  | Asset Purchase Agreement dated July 22, 2003 between DRAXIS Health Inc. and Shire Biochem Inc.                                                                                                                                                                                                            
|4.14*  |  | Stock Option Plan of DRAXIS Health Inc., as amended, dated June 27, 2001                                                                                                                                                                                                                                  
|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 on 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 on 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 on 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 on 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 on 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 on 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 on 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 on 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                                                                                                                                                                                               
|4.24*  |  | Employment Agreement dated April 27, 2004 between DRAXIS Health Inc. and Dan Brazier                                                                                                                                                                                                                      
|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 on 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                                                                                                                                                                               
|4.27*  |  | Employment Agreement dated April 22, 2003 between DRAXIS PHARMA Inc. and John E.M. Durham                                                                                                                                                                                                                 
|4.28*  |  | Amendment dated March 26, 2004 to Employment Agreement dated April 22, 2003 between DRAXIS PHARMA Inc. and John E.M. Durham                                                                                                                                                                               
|       |  |                                                                                                                                                                                                                                                                                                           

106

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|4.29* |  | Employment Agreement dated October 17, 2003 between DRAXIS Health Inc. and Alida Gualtieri                                                                                                                                                               
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.30* |  | Amendment dated March 26, 2004 to Employment Agreement dated October 17, 2003 between DRAXIS Health Inc. and Alida Gualtieri                                                                                                                             
|4.31* |  | Employment Agreement dated March 9, 2004 between DRAXIS Health Inc. and Chien Huang                                                                                                                                                                      
|4.32* |  | Employment Agreement dated March 9, 2004 between DRAXIS Health Inc. and Mark Oleksiw                                                                                                                                                                     
|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 on 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                                                                                                                                  
|4.35* |  | Employment Agreement dated October 1, 1997 between DRAXIS Health Inc. and Dr. Richard J. Flanagan                                                                                                                                                        
|4.36* |  | Amendment dated July 23, 2001 to Employment Agreement dated October 1, 1997 between DRAXIS Health Inc. and Dr. Richard J. Flanagan                                                                                                                       
|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                                                                                                                                                                           

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