**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,DC  20549**

**FORM 20-F**

 

| **(Mark  One)**                      |
|--------------------------------------|
| ** **                           | ** ** |
| o                                    | **REGISTRATION STATEMENT PURSUANT TO  SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                           | ** ** |
| **OR**                               |
| ** **                           | ** ** |
| x                                    | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007** |
| ** **                           | ** ** |
| **OR**                               |
| ** **                           | ** ** |
| o                                    | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
| ** **                           | ** ** |
| **OR**                               |
| ** **                           | ** ** |
| o                                    | **SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
| ** **                           | ** ** |
| **Commission  File Number: 0-17434** |

----

**DRAXISHEALTH INC.**

(Exactname of Registrant as specified in its charter)

 

**CANADA**

(Jurisdiction of incorporationor organization)

 

**SUITE4700, TD BANK TOWER, TORONTO DOMINION CENTRE, TORONTO, ONTARIO, CANADA M5K 1E6**

(Addressof principal executive offices)

----

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

 

| **Title of  each class** | ** ** | **Name of  each exchange on which registered**        |
|--------------------------|------------|-------------------------------------------------------|
| COMMON  SHARES           |       | NASDAQ  Global Select Market

Toronto  Stock Exchange |

----

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

**NONE**

(Title of Class)

 

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

**NONE**

(Title of Class)

 

Indicate the number of outstanding shares of each of the issuer’sclasses of capital or common stock as of the close of the period covered by theannual report.

Shares — 42,062,538 common shares (as of 12/31/07)

 

Indicate by check mark if the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.

    Yes o   No x

 

If this report is an annual or transition report, indicate by check markif the registrant is not required to file reports pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934.   Yes o   No x

 

Note — Checking the box above will not relieve any registrant requiredto file reports pursuant to Section 13 or 15(d) of the SecuritiesExchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.   Yes x   No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

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

 

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

Item 17 o   Item 18 x

 

If this is an annual report, indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).                                                                Yeso  No x

 

** **

----

** **
| **PART I**   | ** **                                                                    | ** ** |
|-------------------|-------------------------------------------------------------------------------|------------|
| ** **        | ** **                                                                    | ** ** |
| ITEM 1.           | IDENTITY OF  DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        | 1          |
| ITEM 2.           | OFFER  STATISTICS AND EXPECTED TIMETABLE                                      | 1          |
| ITEM 3.           | KEY INFORMATION                                                               | 1          |
| ITEM 4.           | INFORMATION ON THE  COMPANY                                                   | 16         |
| ITEM 4A           | UNRESOLVED STAFF  COMMENTS                                                    | 56         |
| ITEM 5.           | OPERATING AND  FINANCIAL REVIEW AND PROSPECTS                                 | 56         |
| ITEM 6.           | DIRECTORS,  SENIOR MANAGEMENT AND EMPLOYEES                                   | 81         |
| ITEM 7.           | MAJOR SHAREHOLDERS  AND RELATED PARTY TRANSACTIONS                            | 104        |
| ITEM 8.           | FINANCIAL INFORMATION                                                         | 105        |
| ITEM 9.           | THE OFFER AND LISTING                                                         | 106        |
| ITEM 10.          | ADDITIONAL  INFORMATION                                                       | 108        |
| ITEM 11.          | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 124        |
| ITEM 12.          | DESCRIPTION OF  SECURITIES OTHER THAN EQUITY SECURITIES                       | 125        |
|              |                                                                          |       |
| **PART II**  | ** **                                                                    | ** ** |
| ** **        | ** **                                                                    | ** ** |
| ITEM 13.          | DEFAULTS,  DIVIDENDS ARREARAGES AND DELINQUENCIES                             | 125        |
| ITEM 14.          | MATERIAL  MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 125        |
| ITEM 15           | CONTROLS AND  PROCEDURES                                                      | 125        |
| ITEM 16A.         | AUDIT COMMITTEE  FINANCIAL EXPERT                                             | 127        |
| ITEM 16B.         | CODE OF ETHICS  AND BUSINESS CONDUCT                                          | 128        |
| ITEM 16C.         | PRINCIPAL  ACCOUNTANT FEES AND SERVICES                                       | 128        |
| ITEM 16D.         | EXEMPTIONS FROM  THE LISTING STANDARDS FOR AUDIT COMMITTEES                   | 129        |
| ITEM 16E.         | PURCHASES OF  EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS       | 129        |
|              |                                                                          |       |
| **PART III** | ** **                                                                    | ** ** |
| ** **        | ** **                                                                    | ** ** |
| ITEM 17.          | FINANCIAL STATEMENTS                                                          | 132        |
| ITEM 18.          | FINANCIAL STATEMENTS                                                          | 132        |
| ITEM  19          | EXHIBITS                                                                      | 133        |

 

 

i

----

 

 

**Item 1.    Identity of Directors, Senior Management and Advisers**

 

Not Applicable

 

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

 

Not Applicable

 

**Item 3.    Key Information**

 

### **Selected ConsolidatedFinancial Data**

### ** **

DRAXIS Health Inc. (“DRAXIS” or the “Company”) is a specialtypharmaceutical company providing products in three categories: sterileproducts, non-sterile products and radiopharmaceuticals.  Sterile products include liquid andfreeze-dried (lyophilized) injectables and sterile ointments.  Non-sterile products are produced as solidoral, liquid and semi-solid dosage forms. Radiopharmaceuticals are used for both therapeutic and diagnosticmolecular imaging applications.  In the radiopharmaceuticalcategory, DRAXIS has its own products and a targeted research and developmentprogram for new products.  As of January 1,2005, all of the operations of the Company are carried out through our whollyowned subsidiary DRAXIS Specialty Pharmaceuticals Inc. (“DSPI”), which operatestwo major divisions, DRAXIS Pharma (contract manufacturing) and DRAXIMAGE(radiopharmaceuticals).  Our operationsare carried out at our sole manufacturing facilities located at 16751,Trans-Canada Highway, Kirkland, Québec, H9H 4J4, Canada (our “manufacturingfacilities” or “facility”).  For the yearended December 31, 2007, 69.7% of our consolidated revenues were derivedfrom DRAXIS Pharma (contract manufacturing) and 29.4% of our consolidatedrevenues were derived from DRAXIMAGE (radiopharmaceuticals).

 

Our subsidiary Deprenyl Animal Health, Inc. (“DAHI”) receiveslicensing and royalty revenue related solely to *ANIPRYL**®*, a companionanimal health product.  It does notengage in any operations.

 

Our registered office is located at Suite 4700, TD Bank Tower,Toronto Dominion Centre, Toronto, Ontario, M5K 1E6, Canada. The phone numberfor the registered office is 416-601-7525. We also have a place of business at 16751 Trans-Canada Highway,Kirkland, Québec, H9H 4J4 where all of our operations are conducted. The phonenumber for this place of business is 514-694-8220. DRAXIS is a corporationgoverned by the *Canada Business CorporationsAct* (the “CBCA” or the “Act”)

 

Unless otherwise indicated herein, the information presented in thisAnnual Report (Form 20-F) is for the year ended December 31,2007.  All amounts expressed herein arein U.S. dollars unless specifically stated otherwise.

 

The selected consolidated income statement data for the years ended December 31,2005, 2006 and 2007, and the selected consolidated balance sheet data as of December 31,2006 and 2007, are derived from the audited Consolidated Financial Statementsincluded elsewhere in this Annual Report (Form 20-F).  The selected consolidated income statementdata for the years ended December 31, 2003 and 2004, and selected consolidatedbalance sheet data as of December 31, 2003, 2004 and 2005 are derived fromour audited consolidated financial statements which are not included in thisAnnual Report (Form 20-F).  Theselected financial data set forth in the following table are presented inaccordance with U.S. generally accepted accounting principles (“U.S.GAAP”).  All data presented below shouldbe read in conjunction with, and is qualified in its entirety by, reference toour audited Consolidated Financial Statements and Notes thereto for the yearended December 31, 2007 which are included in this Annual Report (Form 20-F).

 

1

----

 

**Selected Five-Year Review**

*(inthousands of U.S. dollars except share related data)*

 
|                                                    | ** ** | **2007**       | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** | **2003**   | ** ** |
|---------------------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| **Operations**                                          |       |           |       |       |       |       |       |       |       |       |       |
| Revenues                                                |       |           |       |       |       |       |       |       |       |       |       |
| Product sales                                           |       | **76,072**     |       | 83,545     |       | 72,989     |       | 61,693     |       | 40,535     |       |
| Royalty and licensing                                   |       | **2,788**      |       | 5,422      |       | 6,444      |       | 7,627      |       | 8,658      |       |
|                                                    |       | **78,860**     |       | 88,967     |       | 79,433     |       | 69,320     |       | 49,193     |       |
|                                                    |       | ** **     |       |       |       |       |       |       |       |       |       |
| Operating income                                        |       | **2,148**      |       | 14,952     |       | 9,764      |       | 9,856      |       | 6,686      |       |
|                                                    |       | ** **     |       |       |       |       |       |       |       |       |       |
| Income from  continuing operations                      |       | **1,658**      |       | 11,547     |       | 7,784      |       | 7,977      |       | 4,671      |       |
| (Loss) income  from discontinued operations, net of tax |       | **—**     |       | —     |       | —     |       | (61        | )          | 8,531      |       |
| Net income                                              |       | **1,658**      |       | 11,547     |       | 7,784      |       | 7,916      |       | 13,202     |       |
|                                                    |       | ** **     |       |       |       |       |       |       |       |       |       |
| Basic earnings  per share                               |       | ** **     |       |       |       |       |       |       |       |       |       |
|  - From continuing operations                      |       | **$**          | **0.04**   |       | $          | 0.28       |       | $          | 0.19       |       | $          | 0.20 |   | $ | 0.13 |   |
|  - From discontinued operations                    |       | **—**     |       | —     |       | —     |       | —     |       | 0.23       |       |
|                                                    |       | **$**          | **0.04**   |       | $          | 0.28       |       | $          | 0.19       |       | $          | 0.20 |   | $ | 0.36 |   |
|                                                    |       | ** **     |       |       |       |       |       |       |       |       |       |
| Diluted earnings  per share                             |       | ** **     |       |       |       |       |       |       |       |       |       |
|  - From continuing operations                      |       | **$**          | **0.04**   |       | $          | 0.28       |       | $          | 0.18       |       | $          | 0.19 |   | $ | 0.13 |   |
|  - From discontinued operations                    |       | **—**     |       | —     |       | —     |       | —     |       | 0.23       |       |
|                                                    |       | **$**          | **0.04**   |       | $          | 0.28       |       | $          | 0.18       |       | $          | 0.19 |   | $ | 0.36 |   |
|                                                    |       | ** **     |       |       |       |       |       |       |       |       |       |
| **Financial  Position at December 31**             |       | ** **     |       |       |       |       |       |       |       |       |       |
| Cash and cash  equivalents                              |       | **24,796**     |       | 21,446     |       | 12,390     |       | 5,926      |       | 10,563     |       |
| Total assets                                            |       | **127,934**    |       | 105,962    |       | 95,820     |       | 88,785     |       | 76,553     |       |
| Long-term debt                                          |       | **—**     |       | —     |       | —     |       | —     |       | 10,466     |       |
| Common  shareholders’ equity                       |       | **111,341**    |       | 92,415     |       | 81,628     |       | 69,920     |       | 41,647     |       |
| Book value per  common share                            |       | **2.65**       |       | 2.23       |       | 1.96       |       | 1.70       |       | 1.12       |       |
|                                                    |       | ** **     |       |       |       |       |       |       |       |       |       |
| **Share  Information**                                  |       | ** **     |       |       |       |       |       |       |       |       |       |
| Number of shares  outstanding at end of year            |       | **42,062,538** |       | 41,522,138 |       | 41,588,005 |       | 41,015,326 |       | 37,297,817 |       |
| Weighted average  number of shares - basic              |       | **41,955,989** |       | 41,592,507 |       | 41,471,798 |       | 39,886,219 |       | 37,114,648 |       |
| Weighted average  number of shares - diluted            |       | **42,096,250** |       | 41,675,682 |       | 42,365,782 |       | 41,054,883 |       | 37,194,994 |       |

 

### **Forward-Looking Statements**

### ** **

This Annual Report (Form 20-F) contains forward-looking statements(within the meaning of the Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended) and information that are based on management’s beliefs, as well asassumptions made by and information currently available to management.  When used in this Annual Report (Form 20-F),the words “anticipate”, “estimate”, “forecast”, “plan”, “believe”, “expect”,“potential”, “intend”, “projected”, “designed”, “should” and similarexpressions are intended to identify forward-looking statements, but they arenot the only way we identify such statements. These forward-looking statements necessarily make numerous assumptionswith respect to: industry performance; general business, economic andregulatory conditions; access to markets and materials; and other matters, allof which are inherently subject to significant uncertainties and contingenciesand many of which are beyond our control. Should one or more of these risks or uncertainties materialize, orshould underlying assumptions made or factors considered in making aforward-looking statement prove incorrect, actual results may vary materiallyfrom those anticipated, estimated or projected. We believe that any of the following risk factors could cause our actualresults to differ from those that may have been or may be projected in 

 

2

----

 

forward-looking statementsmade by us or on our behalf from time to time. We caution you that thefollowing list of risk factors is not exclusive and that other risks anduncertainties may cause actual results to differ materially from those inforward-looking statements. The forward-looking statements in this AnnualReport (Form 20-F) are principally contained under Items 4 and 5.

 

**RISKFACTORS**

** **

Our futurefinancial condition, results of operations and business could be materiallyaffected by the risks and uncertainties discussed below, or otherwise, andhistoric trends should not be used to anticipate results or trends in futureperiods:

 

***Risks Related to our Industry***

 

WE MAY NOT BEABLE TO GET TIMELY REGULATORY APPROVAL FOR OUR PRODUCTS AND WE MUST COMPLY WITHREGULATORY REQUIREMENTS TO MANUFACTURE AND MARKET OUR PRODUCTS.

 

The manufacturingand marketing of our existing and potential products, as well as preclinicalstudies and clinical trials, are subject to extensive regulation and approvalby the Therapeutic Products Directorate (“TPD”) of the Health Products and FoodBranch Inspectorate of Health Canada (“HPFBI”) and other authorities in Canadaand by numerous federal, state and local government authorities in the UnitedStates, including the Food and Drug Administration (“FDA”). Similar regulatoryrequirements exist in Europe and other countries.  To the extent we choose to distribute ourproducts in foreign markets, we may rely on licensees to obtain regulatoryapprovals in such countries.  Any failureor delay by us, our collaborators or licensees to comply with applicablerequirements or obtain regulatory approvals for our products could adverselyaffect the marketing of products developed or licensed by us and our ability toreceive product or royalty revenue.

 

As of December 31,2007, DRAXIMAGE had six regulatory submissions filed with European regulatoryauthorities: four with the Medicines Evaluation Board in the Netherlands, onewith the Danish Medicines Agency, and one in Denmark under the decentralizedprocedure.  The submission dates for theradiopharmaceutical products filed in the Netherlands and with the DanishMedicine Agency range from June 2003 to December 2004 (except for oneregulatory submission re-filed in Denmark in 2007 for rewording). All of theapprovals, except for the most recent submission, sought by DRAXIMAGE in Europeare for marketing authorizations through the mutual recognition procedure,which involves obtaining approval in one state (the “reference member state”)and recognition of that approval in other member states.  Five of the approvals being sought byDRAXIMAGE in Europe are for radiopharmaceutical products already approved inCanada or the U.S. The most recent submission is for DRAXIMAGEÒ Sestamibi which has not yet received approval in Canada or the U.S. Twoof these six European submissions, made for DRAXIMAGE MAA kit and MDP kit,received approval in a reference member state, the Netherlands, in February 2005and March 2006.  The MDP kit alsoreceived approval in the United Kingdom in February 2008. The MAA kit hasalso been approved in Germany, the United Kingdom, Austria, Belgium andLuxembourg.  A third approval forDRAXIMAGE’s Sodium Iodide I-131 capsules was granted in reference member state,Denmark, in September 2007.

 

The regulatoryprocess for innovative products generally involves preclinical studies andclinical trials of each compound to establish its safety and efficacy, takes manyyears and requires the expenditure of substantial resources.  For generic products, the regulatory processdoes not typically involve clinical studies. Moreover, if regulatory approval of a drug or diagnostic product isgranted, such approval may entail limitations on the indicated uses for whichit may be marketed.  Our failure tocomply with applicable regulatory requirements can, among other things, resultin the suspension of our regulatory 

 

3

----

 

approvals, product recalls, seizure of products, operating restrictionsand criminal prosecution.  Further,government policy may change and additional government regulations may beestablished that could prevent or delay regulatory approvals for our products.  In addition, a marketed drug and itsmanufacturer are subject to continual review. Later discovery of previously unknown problems with the product ormanufacturer may result in restrictions on such product or manufacturer,including withdrawal of the product from the market.

 

On February 2,2007, DRAXIMAGE announced it had submitted an Abbreviated New Drug Application(“ANDA”) to the FDA for its generic kit for the preparation of Tc-99m Sestamibifor injection (DRAXIMAGEÒ Sestamibi), a nuclear medicine imagingagent used in myocardial perfusion imaging (“MPI”) to evaluate blood flow tothe heart in patients undergoing cardiac tests. On July 25, 2007, DRAXIMAGE announced it had filed DRAXIMAGEÒSestamibi with European regulatory authorities. The Company also filed an Abbreviated New Drug Submission (“A/NDS”) forDRAXIMAGEÒ Sestamibi on August 17, 2007 withHealth Canada.  On October 11, 2007,the Company was informed by Health Canada that this submission had beenscreened and found acceptable for review. We cannot predict if or when we will receive regulatory approvals tomarket this product.

 

The finalproducts in which active pharmaceutical ingredients are used are subject toregulation for safety and efficacy by the FDA, TPD and regulatory authorities inother jurisdictions, as the case may be. All of the final products that DRAXIMAGE or DRAXIS Pharma manufacturemust be approved by the FDA, TPD and the regulatory authorities in otherjurisdictions, as the case may be, before they can be commercially marketed.  The process of obtaining regulatory clearancefor marketing is uncertain, can be costly and time-consuming.  We cannot predict how long the necessaryregulatory approvals will take or whether we or our customers for whom wemanufacture products will ever obtain such approval for products.  To the extent that we and/or our customers donot obtain the necessary regulatory approvals for marketing new products, ourproduct sales could be adversely affected.

 

All productsmanufactured by us (including those manufactured for our contract manufacturingcustomers) have to comply with the current Good Manufacturing Practices(“cGMP”) imposed under the laws of the U.S., Canada and other jurisdictions, aswell as the guidelines and policies of TPD, FDA and the regulatory authoritiesin other jurisdictions, as the case may be. In addition, products containing radioactive isotopes will have tocomply with the guidelines and regulations of the Canadian Nuclear SafetyCommission in Canada and the United States Nuclear Regulatory Commission andother similar regulations in other countries.** **Compliance with cGMP regulationsrequires us to expend time, money and effort on our production facilities andto maintain precise and extensive records and quality control to ensure thatour products meet applicable specifications and other requirements. The FDA,TPD and other regulators may periodically inspect our drug manufacturingfacilities to ensure compliance with applicable cGMP requirements. In 2007, theCompany announced it had received a notification from the FDA that itsmanufacturing facilities continue to maintain their classification asacceptable facilities following an extensive inspection by the FDA in January 2007of all six products and quality systems for the contract manufacturingdivision.  There can be no assurance thatsubsequent inspections will have similar results. In addition, our customersalso periodically inspect our manufacturing facilities to ascertain compliancewith cGMP requirements.  If we fail tocomply with the cGMP requirements, we may become subject to possible regulatoryaction, and manufacturing at the facility could consequently be suspended,causing possible loss of profit, regulatory fines and third-party liability.  To date we have not been subject to anynotice of material non-compliance.

 

The FDA, TPD orother regulatory authorities may also require us to submit specific batches orlots of a particular product for inspection. If the product lot fails to meetapplicable requirements, then the following actions might be taken: (i) restrictthe release of the product; (ii) suspend manufacturing of the specificproduct lot; (iii) order a recall of the product lot; or (iv) order aseizure of the product lot.

 

4

----

 

WE MAY NOT BE ABLE TO OBTAIN AND ENFORCEEFFECTIVE 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 ALICENSE FOR CONDUCTING CERTAIN BUSINESS ACTIVITIES, AND OUR COMPETITIVEPOSITION AND PROFITABILITY COULD SUFFER AS A RESULT.

 

Our successdepends, in part, on our ability to obtain, enforce and maintain patentprotection for our radiopharmaceutical technologies.  Patents for our radiopharmaceuticaltechnologies have expiry dates ranging from November 2008 to December 2020.  We cannot assure you that patents will beissued from any of our pending applications or that claims now or in thefuture, if any, allowed under issued patents will be sufficiently broad toprotect our technology. In addition, we cannot assure you that any patentsissued to or licensed by us will not be challenged, invalidated, infringed orcircumvented, or that the rights granted under these patents will providecontinuing competitive advantages to us. The patent positions of pharmaceutical and biotechnology firms,including ours, are generally uncertain and involve complex legal and factualquestions.  In addition, we do not knowwhether any of our current research endeavors will result in the issuance ofpatents in Canada, the United States or elsewhere, or if any patents alreadyissued will provide significant proprietary protection or will be circumventedor invalidated.  Since patentapplications in the United States and Canada are maintained in secrecy for atleast 18 months from the date of filing, and since publication of discoveriesin the scientific or patent literature tends to lag behind actual discoveriesby several months, we cannot be certain that we will be the first to createinventions claimed by pending patent applications or that we will be the firstto file patent applications for such inventions.  Our failure to obtain patents for ourproducts could negatively affect our competitive position.

 

Our commercialsuccess also depends in part on our not infringing patents or proprietaryrights of others and not breaching the licenses granted to us.  In the event that we are found to haveinfringed other parties’ patents, licenses may not be available to us on termsthat are commercially favorable or at all. In addition, the degree of patent protection afforded to pharmaceuticalor biotechnological inventions around the world is uncertain and variessignificantly among different countries. We cannot assure you that we will be able to license third-partytechnology or patents that we may require to conduct our business or that suchtechnology or patents can be licensed at a reasonable cost. Failure by us orour collaborators or customers to license any technology or patents that we mayneed to commercialize our technologies or manufacture our products may resultin delays in marketing our products or may impede our inability to proceed withthe development, manufacture or sale of products requiring such licenses.  There can be no assurance that any of ourproducts currently in development or our recently approved products willachieve market acceptance.

 

We may be requiredto engage in litigation and other patent proceedings to enforce patents issuedto us, to defend our right, title and interest in patents related to ourproducts and to determine the scope and validity of other parties proprietaryrights.  These proceedings can be costly,and if the outcome of any such proceedings is adverse to us, we could lose the rightto sell some of our products or could be required to pay damages, which may besubstantial.

 

We also rely onunpatented trade secrets, improvements and know-how with respect to ourcontract manufacturing operations and all of our operations associated with ourradiopharmaceutical kit business to develop and maintain our competitiveposition, which we seek to protect, in part, by confidentiality agreements withour customers, collaborators, employees and consultants.  These agreements could be breached, and wemay not have adequate remedies for any breach. Further, our trade secrets couldotherwise become known or be independently discovered by our competitors.

 

ALTHOUGH WE CARRYPRODUCT LIABILITY INSURANCE, A SUCCESSFUL 

 

5

----

 

 

LIABILITY CLAIMCOULD NEGATIVELY IMPACT OUR BUSINESS.

 

We may besubject to liability claims by those who purchase our contract manufacturingservices, for the use of any of our products under clinical development and thesale and use of any of our approved products. Such claims may be made directly by customers, consumers, healthcareproviders, pharmaceutical companies or others selling such products.  Although we believe that our insurancecoverage is reasonably adequate to insulate us from potential product liabilityclaims and we have not historically experienced any problems associated withclaims by those who purchase our contract manufacturing services or users ofour products under clinical development or the radiopharmaceutical productsthat we manufacture, we cannot provide any assurance that we will be able tomaintain insurance coverage at a reasonable cost or in sufficient amounts toprotect us against losses due to this potential liability.  We may not be able to maintain or obtainadditional commercially reasonable product liability insurance for any of ourproducts approved for marketing and sale. Even unsuccessful product liability claims could result in theexpenditure of funds in litigation and the diversion of management time andresources and could damage our reputation and impair the marketability of ourproducts, which could have a material adverse effect on our financial conditionand results of operation.

 

On July 22,2005, we announced that, together with other defendants, we had received aStatement of Claim filed before the Superior Court of Justice of Ontarioalleging that PermaxÒ, a drug that we distributed in Canada for a third party manufacturerprior to July 2003, causes “compulsive/obsessive behaviour, includingpathological gambling”.  The plaintiff isseeking to have this action certified as a class action.  We believe this claim against us is withoutmerit and we intend to vigorously defend this proceeding and any motion forcertification.  Prior to July 2003,PermaxÒ was distributedin Canada by DRAXIS Pharmaceutica, our Canadian pharmaceutical sales andmarketing division.  In July 2003,we sold the DRAXIS Pharmaceutica division to Shire BioChem Inc. (“Shire”).  On February 29, 2008, the plaintiff served anAmended Statement of Claim and a Motion Record in support of the plaintiff’smotion for certification of this action as a class proceeding.  The defendants must file a response toplaintiff’s motion for certification by July 31, 2008.

 

IF THE MARKET DOESNOT ACCEPT OUR PRODUCTS CURRENTLY IN DEVELOPMENT OR AWAITING APPROVAL, OURBUSINESS COULD BE HARMED.

 

There can be noassurance that any of our products currently in development, or those awaitingapproval or our recently approved products will achieve market acceptance.  The degree of market acceptance will dependupon a number of factors, including the receipt of regulatory approvals(generic and innovative products), the establishment and demonstration in themedical community of the clinical efficacy and safety of our products(innovative products), the establishment and demonstration of their potentialadvantages to existing and new diagnostic and treatment methods and thereimbursement policies of government and third-party payers and, mostimportantly, the launching of competing products by our competitors that becomeestablished prior to the launch of our products in development. There can be noassurance that physicians, patients, payers or the medical community in generalwill accept and utilize any of our existing or future products.

 

Weanticipate that we will face increased competition in the future as newproducts enter the market, as we enter new markets with generic and potentiallyproprietary products and advanced technologies become available.  There can be no assurance that existingproducts or new products developed by our competitors will not be moreeffective, or be more effectively marketed and sold, than any of the productsthat may be developed, manufactured or sold by us.  Competitive products may render our productsobsolete and uncompetitive prior to recovering our research, development orcommercialization expenses incurred with respect to any such products.

 

6

----

 

We maylose market exclusivity for one or more of our proprietary products due togeneric challenges.  This is because theintroduction of a generic version of the same or similar products typicallyresults in a significant reduction in net sales for the relevant product, giventhat generic manufacturers typically offer their versions of the same productat sharply lower prices.

 

Forexample, in a press release dated November 1, 2007, we announced that theCompany was ceasing all further activities related to its product *INFECTON**Ò* and redeploying itsdevelopment teams to other projects following the results of additionalformulations for the product which indicated that sufficient specifity andsensitivity could be achieved in a cost effective manner which would becommercially important.  In another pressrelease dated March 27, 2006, we announced that although our product *FIBRIMAGE**Ò* had met primary end points inits Phase III clinical trial in Canada, further market analysis had shown thatnew technologies had successfully captured the current deep venous thrombosisindications and there was no longer an economically interesting marketopportunity at this time in either the at-risk asymptomatic patient, or thosewith symptoms.  We further indicated thatwe had decided that no significant further work would be conducted in thedevelopment of this product for its current indications but that otherpotential opportunities for this product would be explored.  In 2006 and 2007, no other potentialopportunities were uncovered.

 

Webelieve that AZEDRAÔ, being developed by MolecularInsight Pharmaceuticals, Inc. (“MIPI”) may compete with our DRAXIMAGEÒ I-131 MIBG product under clinicaldevelopment.  AZEDRAÔ has received Orphan Drug status and a FastTrack designation by the FDA.  Accordingto information set forth in its website, MIPI is conducting a Phase I dosimetrystudy with AZEDRAÔ in adults at DukeUniversity.  The initial target marketfor AZEDRAÔ dosimetry study is thetreatment of metastatic neuroendocrine tumours such as pheochromocytoma, carcinoidand neuroblastoma that are not amenable to treatment with surgery orconventional chemotherapy.  Metastatictumours are tumours that spread to other organs or parts of the body.  Additionally, according to information setforth in its website, MIPI initiated a Phase I/II study dose-finding andtherapeutic evaluation of the product in patients with malignantPheochromocytoma/Paraganglioma, which completion is expected for July 2012.The primary objectives of this study are to determine the maximum tolerateddose of the product and then, to determine the objective tumor response ratenine months following treatment.

 

On February 27, 2008,Covidien announced it had received tentative approval from the FDA for itsgeneric Sestamibi.  This product willcompete with our DRAXIMAGEÒ Sestamibi product forwhich we filed an ANDA with the FDA in February 2007 and for which we havenot yet received an approval.  Failure toreceive this approval could have a material negative impact on the expectedfuture results of our operations.

 

WE DO NOTHAVE THE SAME AMOUNT OF RESOURCES AS SOME OF OUR COMPETITORS.

 

Many of ourexisting or potential competitors, particularly large pharmaceutical companies,have substantially greater financial, technical and human resources than we do.In addition, many of these competitors have significantly greater experience inundertaking research, preclinical studies and human clinical trials of newpharmaceutical products, including innovative and generic products, obtainingregulatory approvals, manufacturing and marketing such products.  Accordingly, our competitors may succeed incommercializing or manufacturing products more rapidly or effectively than wecan.

 

WE OPERATE IN A VERY COMPETITIVE MARKET.

 

DRAXIS Pharma, our contract manufacturing division, competes withpharmaceutical companies that have in-house manufacturing capabilities as wellas with third-party contract manufacturers, 

 

7

----

 

including Hospira Inc., Boehringer Ingelheim GmbH, Catalent PharmaSolutions Inc., DPT Laboratories Ltd, Haupt Pharma AG, Patheon Inc.,Hollister-Stier Laboratories LLC and DSM Pharmaceuticals, Inc.

 

DRAXIMAGE, ourradiopharmaceuticals division, competes with the following companies that havesignificant radiopharmaceutical operations: Lantheus Medical Imaging (formerlyBristol-Myers Squibb Imaging), GE Healthcare, Covidien, CISbio, and BraccoS.p.A.  In addition, there are a numberof companies that are developing and/or marketing other radiopharmaceutical products,including MDS Nordion Inc., Immunomedics Inc., IBA Molecular, CytogenCorporation, International Isotopes Inc. and Molecular Insight Pharmaceuticals, Inc.

 

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

 

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

 

The research anddevelopment process of a new pharmaceutical product can take up to ten years orlonger, from discovery to commercial product launch.  New products do not only need to undergointensive pre-clinical and clinical testing, but must also pass a highlycomplex, lengthy and expensive approval process.  During each stage of the process, there is asubstantial risk that we will encounter serious obstacles or will not achieveour goals and accordingly we may abandon a product in which we have invested substantialamounts of time and money.

 

Before obtainingregulatory approval for the commercial sale of any innovative product underdevelopment, we must demonstrate through preclinical studies and clinicaltrials that the product is safe and efficacious.  In November 2006, we announced thatDRAXIMAGE had received approval from the FDA to run two clinical trials usingradioactive Iobenguane I-131 Injection (also known as I-131Metaiodobenzylguanidine or I-131 MIBG) to treat high-risk neuroblastoma, a rareform of cancer that affects mostly infants and young children, one trial is aPhase II study and another is a Phase I study. Both trials are ongoing.  Theresults of preclinical studies and early-stage clinical trials may not betotally predictive of results obtained in larger late-stage clinical trials,and there can be no assurance that our clinical trials will demonstrate safetyand efficacy, achieve regulatory approvals or result in marketableproducts.  A number of companies in thebiotechnology and pharmaceutical industry have suffered significant setbacks inadvanced clinical trials, even after achieving promising results in earlierclinical trials.

 

OUR PROFITABILITYDEPENDS IN PART ON REIMBURSEMENT POLICIES AND REGULATIONS OF GOVERNMENTHEALTH ADMINISTRATION AUTHORITIES, PRIVATE 

 

8

----

 

HEALTH INSURERS AND OTHER ORGANIZATIONS.

 

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

 

***Risks Related to our Company***

 

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

 

Asubstantial portion of our consolidated revenues are now, and are expected tocontinue to be, realized in U.S. dollars. Our operating expenses are primarily paid in Canadian dollars.  We may be adversely affected by a significantand rapid strengthening of the Canadian dollar against the U.S. dollar, shouldthe Canadian dollar rise in value compared to the U.S. dollar by more than 10cents.  We do not currently usederivative instruments to hedge our foreign exchange risk and currently have noplans to do so in the near future.  Forfiscal year 2007, U.S. dollar revenue accounted for approximately 51% of theCompany’s consolidated revenue.  Duringthis same period, the value of the Canadian dollar versus the U.S. dollarstrengthened by 18% from January 1, 2007 to December 31, 2007.  As a result, in 2007 we had to charge toincome $1.7 million of foreign exchange loss related to the strengthening ofthe Canadian dollar.

 

OURMANUFACTURING FACILITIES ARE CURRENTLY LOCATED IN THE SAME LOCATION AND FACTORSBEYOND OUR CONTROL COULD CAUSE AN INTERRUPTION IN OUR MANUFACTURING OPERATIONS,WHICH WOULD ADVERSELY AFFECT OUR REPUTATION IN THE MARKETPLACE AND OUR RESULTSOF OPERATIONS.

 

Our manufacturingfacilities are currently located in the same location in Kirkland, Québec.  To succeed, we must be able to operate ourmanufacturing facilities without significant interruption and deliverradiopharmaceutical and contract manufacturing products in a timely manner. Wecould suffer an interruption in our manufacturing operations caused by damagefrom a variety of sources, many of which 

 

9

----

 

are not within our control, including fire, flood, earthquake and othernatural disasters; power loss and telecommunication failure; disruption totransportation systems; major equipment or machinery failure; software andhardware errors, failures or crashes and similar disruptions; or undue delaysor restrictions with air transport systems and cross-border shipments. Anysignificant interruptions in our manufacturing operations or our ability toreceive key raw materials or components or to deliver time-sensitive productswould damage our reputation in the marketplace and have a negative impact onour results of operations.  For example,our radiopharmaceutical revenues were adversely impacted by lower demandrelated to an industry shortage of radioactive medical isotopes in the fourthquarter of 2007.  This was related to anextended shutdown at one of the largest global suppliers of radioactiveisotopes late in 2007.  While the Companyhas an alternative approved source of supply for its radioactive isotopes, theshutdown affects the ability of radiopharmacies to carryout proceduresresulting in lower demand.  In addition,during the third quarter of 2005, DRAXIS Pharma, our contract manufacturingoperating division, extended its regularly scheduled summer shutdown period atthe beginning of the third quarter in the sterile area of our manufacturingfacilities, in order to correct an electrical panel failure and make associatedrepairs.  The revalidation of the entiresterile area following these repairs and the related recalibration ofproduction schedules due to this interruption had material financialimplications which negatively affected third and fourth quarter 2005 results.  As a further example, if there were acessation of flights leaving Canada for the U.S., then the radiopharmaceuticalproducts manufactured by DRAXIMAGE, which are delivered in part via airplanes,could not be delivered to customers on a timely basis and our products would beharmed due to their short shelf-life. Also, if there were a prolonged loss of hydroelectric power at our solemanufacturing facilities, then the manufacturing of our products may be impairedbecause we may not have sufficient back-up electrical power from ourindependent generators for the duration of the hydroelectric interruption.  Although we believe that we carry adequateproperty and business interruption insurance, we cannot assure you that we willbe able to maintain such insurance coverage at a reasonable cost or insufficient amounts to protect us against all potential eventualities.

 

In addition,because our products are intended to promote the health of patients, any supplydisruption could lead to allegations that the public health, or the health ofindividuals, has been endangered and could subject us to lawsuits.

 

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

 

To besuccessful, we must continually establish and maintain strategic or keyrelationships with other companies or organizations in a number ofbiotechnology and pharmaceutical industry segments.  This is critical to our success because suchrelationships enable us to extend the reach of our products and sales invarious jurisdictions, generate additional revenue and develop and deploy newproducts in various marketplaces. Entering into strategic relationships is complicated, as some of our currentand future strategic partners may decide to compete with us in some or all ofthe markets in which we operate or refuse to fulfill or honor their contractualobligations to us.  In addition, ourrelationships with customers always require us to manufacture products inaccordance with their specifications that are provided to us from time totime.  If we are unable to meet ourcustomers’ specifications, our strategic relationships would be harmed.

 

Wecurrently have strategic relationships with our four largest customers (i) GlaxoSmithKlineInc. (“GSK”) to supply it with established sterile products marketed by GSK inmultiple international markets and a prescription sterile injectable productfor the U.S. market, (ii) Genzyme Corporation (“Genzyme”) to manufactureHectorol® Injection, (iii) Johnson & Johnson Consumer Companies, Inc.(“JJC”) to manufacture a broad portfolio of multiple non sterile specialtysemi-solid products currently marketed in the United States, as well as Johnson &Johnson, Inc. (prior to December 20, 2006, Pfizer ConsumerHealthcare, a division of Pfizer Canada, Inc.), that covers severalnon-prescription products for 

 

10

----

 

the Canadian market including Polysporin®, Sudafed®and Actifed®, and (iv) Cardinal Health 414, LLC with respect to our IodineI-131 kits, MAA, DTPA and MDP products sold in the U.S.

 

Duringthe third quarter of 2007, the Company announced it had expanded its existingcontract manufacturing relationship with JJC and entered into a new definitivesupply agreement to manufacture a broad portfolio of multiple non-sterilespecialty semi-solid products currently marketed in the United States.  This new multi-year contract runs to the endof 2013 and may be extended beyond that date. It includes approximately twoyears of manufacturing site transfer and process validation activities followedby five years of commercial production, that is scheduled to begin in 2009. Weexpect commercial production to generate incremental revenues in excess of $120million over the five year period of 2009 through 2013. The transfer ofequipment and production technologies, currently in progress, is expected togenerate additional cumulative revenues during 2007 and 2008 of approximately$6 million to $8 million.  In 2007,revenues of $2.6 million were generated from this contract.

 

On December 20, 2007, DRAXIS announced thatDRAXIMAGE, its radiopharmaceutical division, appointed GE Healthcare, anindustry leader in nuclear medicine, as the exclusive distributor of DRAXIMAGE®Sestamibi in the United States. DRAXIMAGE® Sestamibi is a generickit for the preparation of Technetium (Tc-99m) Sestamibi injection, adiagnostic cardiac imaging agent used in myocardial perfusion imaging (MPI) toevaluate blood flow to the heart.

 

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

 

For the year endedDecember 31, 2007, our four largest customers, GlaxoSmithKline, GenzymeCorporation, Johnson & Johnson Inc. (which includes JJC) and CardinalHealth 414, LLC, represented 55% of our consolidated revenues (19%, 15%, 11%and 10% respectively). The termination by any of these customers of itsrelationship with us would have a material adverse effect on our business,financial condition and results of operations unless we could replace thesecustomers in a timely fashion.  Moreover,we are exposed to a concentration of credit risk as a result of thisconcentration among our customers.  Shouldone or more of our key customers experience financial difficulties, the effectwould be substantially greater than it would have been the case in thepast.  Each of these factors could have amaterial negative impact on our results of operations.

 

IF OURCOLLABORATORS, EMPLOYEES, OR CONSULTANTS DISCLOSE OUR CONFIDENTIAL INFORMATIONTO OTHERS DESPITE CONFIDENTIALITY AGREEMENTS IN PLACE, OUR BUSINESS MAY SUFFER.

 

Ourpractice is to require our key employees, collaborators, consultants andoutside scientific advisors to execute confidentiality agreements upon thecommencement of employment or consulting relationships.  These agreements provide that allconfidential information developed or made known to the individual during thecourse of the individual’s relationship with us is to be kept confidential andnot disclosed to third parties, subject to certain specific limitedexceptions.  In the case of employees,the agreements provide that all inventions conceived by the individual shall beour exclusive property.  Theseagreements, however, may not provide meaningful protection for our tradesecrets or adequate remedies in the event of unauthorized use or disclosure ofsuch information.  For example, tradesecrets regarding the recipe to manufacture our radiopharmaceutical kits orcapsule products could be disclosed, allowing our competitors to copy therecipe and manufacture a competing product.

 

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

 

11

----

 

Pharmaceutical drug manufacturing is a highly regulated industry,requiring significant documentation and validation of manufacturing processesand quality control assurance prior to approval of the facility to manufacturea specific drug.  There can beconsiderable transition time between the initiation of a contract tomanufacture a product and the actual initiation of the manufacturing of thatproduct.  Any lag time in the initiationof a contract to manufacture a product and the actual initiation of themanufacturing at our facilities could cause us to lose profits.

 

We have in place facilities and procedures designed to reduce and, tothe extent possible, eliminate the risk of environmental contaminationresulting from the processing of raw materials and, more specifically, from theradiopharmaceutical business of DRAXIMAGE and the contract manufacturingbusiness of DRAXIS Pharma.  We also havein place regular maintenance programs to ensure continued compliance with allapplicable health and safety, environmental and nuclear safetyregulations.  We believe that theoperations at our manufacturing facilities comply in all material respects withapplicable health and safety, environmental and nuclear safety laws.

 

Canadian and U.S. federal, state, local and provincial regulationsgovern extensively the use, manufacture, storage, handling, transport anddisposal of hazardous material and associated waste products.  Although we believe that the operations atour facilities comply in all material respects with applicable laws andregulations, we cannot completely eliminate the risk of substantialenvironmental liabilities especially in respect of environmental contaminationresulting from the processing of raw materials from the radiopharmaceuticalbusiness of DRAXIMAGE and the manufacturing business of DRAXIS Pharma.  Any failure by us or any of our subsidiariesto comply with such present or future laws and regulations could result in anyof the following: (i) cessation of portions or all of our or oursubsidiaries’ operations; (ii) imposition of fines; (iii) restrictionson our or our subsidiaries’ ability to carry on or expand our operations; (iv) significantexpenditures by us in order to comply with laws and regulations; or (v) liabilitiesin excess of our resources.  As of December 31,2007, we have not received any notice stating that we are not in compliancewith any such legislation applicable to us.

 

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

 

Theproducts manufactured by DRAXIS Pharma represent a significant amount of ourconsolidated revenues.  For the yearended December 31, 2007, 69.7% of our consolidated revenues were derived from DRAXIS Pharma.  Although a collective agreement with afive-year term to April 30, 2008 between DRAXIS Pharma and the United Food &Commercial Workers International Union, Local 291 (AFL-CIO) was ratified in February 2004,we cannot assure you that labour difficulties will not arise, and if they didarise then the production and delivery of those products manufactured by DRAXISPharma would be impaired for the duration of those labor difficulties.  Those products manufactured by DRAXIMAGE mayalso be impaired if access to our sole manufacturing facilities is hindered bythese labor difficulties. The present collective agreement terminates on April 30,2008.  We are presently preparing tonegotiate a new collective agreement with the union and cannot assure you thatwe will negotiate the same terms as the existing agreement.

 

OUR FUTURE SUCCESSDEPENDS ON OUR ABILITY TO GROW, AND IF WE ARE UNABLE TO MANAGE OUR GROWTHEFFECTIVELY, WE MAY INCUR UNEXPECTED EXPENSES AND BE UNABLE TO MEET OURCUSTOMERS’ REQUIREMENTS.

 

We willneed to maintain, expand and upgrade our manufacturing facilities andoperations to execute current commercial obligations to customers, widen ourcustomer base and increase manufacturing efficiencies over the next fewyears.  We cannot be certain that DRAXISPharma will be able to enter into enough lucrative third-party manufacturingcontracts to increase its profitability. If we 

 

12

----

 

do secure advantageous agreements, we cannot becertain that our employees, systems, procedures, controls, productive capacityand existing space will be adequate to support expansion of theoperations.  Our future operating resultswill depend on the ability of our officers and key employees to manage changingbusiness conditions and to implement and improve our technical, administrative,financial control and reporting systems and operational excellence in order toachieve established business objectives. An unexpectedly large increase in the volume of manufacturing businessor the number of orders placed by customers may require us to expand capacityand further upgrade our manufacturing facilities and the technology related toour manufacturing.  We may not be able toproject the rate of timing of such increases or customer demands accurately orto expand and upgrade our manufacturing facilities and supporting systems andinfrastructure to accommodate such increases. Difficulties in managing future growth and meeting customers’ expandedrequirements could have a significant negative impact on our business and itsprofitability.

 

IF OURINTERNAL CONTROLS OVER FINANCIAL REPORTING ARE FOUND NOT TO BE EFFECTIVE OR IFWE MAKE DISCLOSURE OF EXISTING OR POTENTIAL SIGNIFICANT DEFICIENCIES ORMATERIAL WEAKNESSES IN THOSE CONTROLS, INVESTORS COULD LOSE CONFIDENCE IN OURFINANCIAL REPORTS, AND OUR STOCK PRICE MAY BE ADVERSELY AFFECTED.

 

Beginningwith this Annual Report (Form 20-F) for the year ending December 31,2007, Section 404 of the Sarbanes-Oxley Act of 2002 requires us to includea report of management on the Company’s internal control over financialreporting with our Annual Report (Form 20-F).  That report must include management’sassessment of the effectiveness of our internal control over financialreporting as of the end of the fiscal year. Additionally, beginning with our Annual Report for the year ending December 31,2007, our independent registered public accounting firm is required to issue areport on the effectiveness of our internal controls over financialreporting.  This Annual Report (Form 20-F)includes a report on the effectiveness of our internal controls over financialreporting from our independent registered public accountants as of December 31,2007.

 

We continueto evaluate our existing internal controls over financial reporting accordingto the standards adopted by the Public Company Accounting Oversight Board(“PCAOB”).  During the course of ourongoing evaluation of the internal controls, we may identify areas requiringimprovement, and may have to design enhanced processes and controls to addressissues identified through this review. Despite the existence of material weaknesses or significant deficienciesin our internal controls over financial reporting, we may fail to identifythem.  Remedying any deficiencies,significant deficiencies or material weaknesses that we and/or our independentregistered public accounting firm are able to identify, may require us to incursignificant costs and expend significant time and management resources.  Further, any of the measures we implement toremedy any such deficiencies may not effectively mitigate or remedy suchdeficiencies.

 

Anyfailure to remedy the deficiencies identified by management, any failure to implementrequired new or improved controls and the discovery of unidentifieddeficiencies could harm our operating results, cause us to fail to meet ourreporting obligations, subject us to increased risk of errors and fraud relatedto our financial statements or result in material misstatements in, anduntimely filing of, our financial statements. The existence of a material weakness could also cause a restatement offuture presented financial statements. Investors could lose confidence in our financial reports, and our stockprice may be adversely affected, if our internal controls over financialreporting are found not to be effective by management or by an independentregistered public accounting firm, or if we make disclosure of existing orpotential significant deficiencies or material weaknesses in those controls.

 

OUR FINANCIALRESULTS MAY FLUCTUATE, AND OUR FUTURE REVENUE AND 

 

13

----

 

PROFITABILITY ARE UNCERTAIN.

 

Ourability to achieve and maintain profitability in the foreseeable future dependson the commercial success of our products and services.  Because we have recently launched newproducts in new markets such as our SMART-FILLÔ Capsule Filler which was launched in the U.S. in August 2007,revenues are difficult to predict and may fluctuate substantially from periodto period.  In addition, productdevelopment programs will require substantial additional investment, includingthe cost of clinical trials for innovative products (such as the costs of ourclinical trials for DRAXIMAGEÒ I-131 MIBG) and obtaining regulatory approvals for the sale of ourproducts such as DRAXIMAGEÒ Sestamibi for which we filed an ANDA with the FDA in February 2007,a submission to European authorities in July 2007 and an A/NDS in Canadain August 2007.  Our solemanufacturing facilities will continue to require capital investment in orderto maintain, upgrade and expand their operations.  The success of DRAXIMAGE and DRAXIS Pharmawill rely significantly on the ability of both divisions to maintain and tosubstantially increase their manufacturing capabilities to satisfy customerdemand.  There can be no assurance that,or when, we will successfully develop, receive regulatory approvals for, ormanufacture or market any new products for our own marketing purposes or forthird parties.  DRAXIS Pharma may fail torenew its existing manufacturing contracts or may fail to secure sufficientlylucrative new third-party manufacturing contracts to increase itsprofitability.  For example, revenues forDRAXIMAGE were impacted in the fourth quarter of 2007 by lower demand relatedto an industry shortage of radioactive medical isotopes.  This was related to an extended shutdown atone of the largest global suppliers of radioactive isotopes late in 2007.  While DRAXIMAGE has an alternative FDAapproved source of supply of its radioactive isotopes, the shutdown affectedthe ability of radiopharmacies to carryout procedures resulting in lowerdemand.  In addition, DRAXIS Pharma maylose anticipated volumes of products if the customers for whom it manufacturessaid products do not receive required approvals for the commercial sale ofsame.  DRAXIS Pharma may also loseanticipated volumes of existing products if its customers lose market share forproducts due to decreased demand for said products.  DRAXIMAGE may fail to increase its marketpenetration of its radioactive products, particularly in the U.S.  DRAXIMAGE may also fail to increase itsinternational sales of its key Tc-99m kits and Iodine I-131 products,particularly in Europe, if it does not receive approvals to market saidproducts or if it is not able to capture a significant market share for thoseproducts once they are approved. DRAXIMAGE may not receive timely regulatory approval of its DRAXIMAGEÒ Sestamibi product.  The research,development, production and marketing of new products like MOLY-FILLÔ (our Technetium Tc-99m Generator) or DRAXIMAGEÒ I-131 MIBG will require the application of considerable technical andfinancial resources by us and our customers, while revenues that are generatedby such products, if approved and successfully developed and marketed, may notbe realized for several years.  We maynot be able to sustain current and planned levels of profitability.  We may require external financing to completecertain aspects of our three-year strategic plan, and external sources ofcapital may not be available to us at an acceptable cost, if at all.

 

IF WE CANNOT ADAPTTO CHANGING TECHNOLOGIES, OUR PRODUCTS AND SERVICES MAY BECOME OBSOLETEAND OUR BUSINESS COULD SUFFER.

 

Because thebiotechnology, pharmaceutical and radiopharmaceutical industry is characterizedby technology change and obsolescence, we may be unable to anticipate changesin our current and potential customer requirements that could make our existingtechnology obsolete.  Our success willdepend, in part, on our ability to continue to enhance our existing productsand services, develop new technology that addresses the increasingsophistication and varied needs of our respective customers, license leadingtechnologies and respond to technological advances and emerging industrystandards and practices on a timely and cost-effective basis.  The development of our proprietary technologyand investing in certain niche markets entails significant technical, financialand business risks.  We may not besuccessful in 

 

14

----

 

using our new technologies or exploiting our niche markets effectivelyor adapting our businesses to evolving customer requirements or emergingindustry standards.

 

DRAXIMAGE has alsoidentified additional new product opportunities in the area of non-radioactivecontrast media that are used in the medical imaging field and is pursuingpotential product development strategies to leverage both its position in themarketplace and its preferred access to appropriate productionprocess expertise.  Contrast mediaproducts are injectable liquids produced in highly-specialized cGMP sterileproduction facilities, such as those in place at DRAXIS’ facilities which arecurrently used to produce certain diagnostic imaging products marketed byDRAXIMAGE. The North American market for contrast media has been estimated tobe valued at approximately $1.6 billion and we believe that is growing drivenlargely by the continued growth of computer tomography (“CT”) and enhancedmagnetic resonance imaging (“MRI”) procedures.

 

AN INABILITY TOATTRACT AND RETAIN QUALIFIED PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS

 

Our successdepends upon skilled personnel in key parts of the Company.  The loss of the service of key members of theCompany, particularly principal members of our management team, may delay orprevent achievement of major business objectives.  We have employment agreements with allprincipal members of our management team with no fixed duration.  We face intense competition for qualifiedindividuals from numerous pharmaceutical companies, universities, governmentalentities and other research institutions. As a result, we may be unable to attract and retain qualifiedindividuals in sufficient numbers, which would have a material negative impacton our results of operations.

 

ALTHOUGHWE CONSIDER THE COMPANY TO HAVE GOOD DEFENSES TO SUCH ACTIONS, SHOULD THECURRENT LAWSUITS AGAINST US SUCCEED, WE COULD INCUR A SUBSTANTIAL LOSS.

 

In 1998, aCanadian legal proceeding was launched against us and our subsidiary DAHI by aformer consultant, Jozsef Knoll, claiming royalty entitlements based on the netprofit from sales of *ANIPRYL*®(the “Knoll proceeding”).  Total damagesclaimed are $100 million, including a claim to certain shares of DAHI. However,the plaintiff has taken no steps in the last eight years to move the claimforward.  While we believe that we havegood defenses to the Knoll proceeding, this dispute may not be resolved in ourfavor, if it is pursued.  It is possiblethat a court or arbitration tribunal may find us to be in breach of certainagreements, or infringing validly issued patents of third parties or practicingthe intellectual property of others.  Inthat event, in addition to the cost of defending the underlying proceeding, wemay have to pay license fees, additional royalties and/or damages and may beordered to assign certain *ANIPRYL®-*relatedpatents and be prohibited from conducting certain activities.  Under such circumstances, we could incursubstantial loss and our business could be negatively affected.

 

On July 22,2005, we announced that, together with other defendants, we had received aStatement of Claim filed before the Superior Court of Justice of Ontarioalleging that PermaxÒ, a drug that we distributed in Canadafor a third party manufacturer prior to July 2003, causes“compulsive/obsessive behaviour, including pathological gambling”.  The plaintiff is seeking to have this actioncertified as a class action.  We believethis claim against us is without merit and we intend to vigorously defend thisproceeding and any motion for certification. Prior to July 2003, PermaxÒ was distributed in Canada by DRAXISPharmaceutica, our Canadian pharmaceutical sales and marketing division.  In July 2003, we sold the DRAXISPharmaceutica division to Shire. On February 29, 2008, the plaintiffserved an Amended Statement of Claim and a Motion Record in support of theplaintiff’s motion for certification of this action as a class proceeding.  The defendants must file a response toplaintiff’s motion for certification by July 31, 2008.

 

15

----

 

 

***Risks Related to our Common Shares***

 

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

 

The market prices for the securities of smallerpharmaceutical and biotechnology companies, including ours, have historicallybeen volatile, and the market has, from time to time, experienced significantprice and volume fluctuations that are unrelated to the operating performanceof particular companies.  For the lasttwo fiscal years, the price of our stock has ranged from a low of $3.27, to ahigh of $6.64 on NASDAQ (CDN$3.29 to CDN$7.59 on the Toronto StockExchange).  We believe that in the firsthalf of 2007 the increase in the share price and volumes of shares traded wasimpacted by positive financial results that differed from market expectationsas well as an increased recognition of the potential future value of theproducts in our R&D pipeline, particularly products under development atDRAXIMAGE.  We believe that the reductionof the share price and volumes of shares trading in the second half of 2007occurred as a result of significant declines in financial performance that werewell below market expectations and that caused the Company to twice reduce itsearnings guidance during this period.  We believe that inthe first half of 2006 the volatility in the share price and volumes of sharestraded was impacted by financial results that differed from market expectationsas a continuing result of the extended shutdown in 2005 of production ofsterile products at DRAXIS Pharma. We believe that the appreciation of theshare price and volumes of shares trading in the second half of 2006 occurredas a result of improved financial results that came closer to marketexpectations and a growing recognition of the potential value of new products indevelopment.

 

Factors such asfluctuations in our operating results, announcements of competing technologicalinnovations or new products by our competitors, clinical trial results,governmental regulation and enforcement actions, developments in patent orother proprietary rights, public concern as to the safety of drugs developed byus or others and general market conditions can have an adverse effect on themarket price of our shares.  Inparticular, the realization of any of the risks described herein could have amaterial adverse impact on such market price. Unusual sales of substantial amounts of our shares in the public marketover a relatively short time period, or the perception that such sales willoccur, could also adversely affect the market price of our shares and make itmore difficult in the future for us to raise funds through equity offerings.

 

**Item 4.  Informationon the Company**

 

DRAXIS is a specialty pharmaceutical company providing products in threecategories: sterile products, non-sterile products andradiopharmaceuticals.  Sterile productsinclude liquid and freeze-dried (lyophilized) injectables and sterileointments.  Non-sterile products areproduced as solid oral, liquid and semi-solid dosage forms.  Radiopharmaceuticals are used for boththerapeutic and diagnostic molecular imaging applications.  In the radiopharmaceutical category, DRAXIShas its own products and a targeted research and development program for newproducts.  As of January 1, 2005,all of the operations of the Company are carried out through our wholly ownedsubsidiary DRAXIS Specialty Pharmaceuticals Inc., which operates two majordivisions, DRAXIS Pharma (contract manufacturing) and DRAXIMAGE(radiopharmaceuticals).  For the yearended December 31, 2007, 69.7% of our consolidated revenues were derivedfrom DRAXIS Pharma (contract manufacturing) and 29.4% of our consolidatedrevenues were derived from DRAXIMAGE (radiopharmaceuticals).

 

In addition, DRAXIS has continuing financial interests associated withits collaboration agreements with Pfizer Inc. with respect to *ANIPRYL**®*.

 

16

----

 

Our consolidated operations are integrated across research, productdevelopment, manufacturing, sales and marketing, as well as the in-licensingand commercial development of radiopharmaceutical products and technologies.

 

DRAXIS has emerged from a transitional phase of its development.  In past years, we were reliant on incomeearned from *ANIPRYL**®*.  For the year ended December 31, 2007, ourcollaboration agreement with Pfizer Inc. with respect to *ANIPRYL**®* represented 2.2%of our consolidated revenues which represented the majority of our income fromroyalties and licensing.

 

The common shares of DRAXIS are listed on the Toronto Stock Exchange(ticker symbol DAX) and on NASDAQ (ticker symbol DRAX).  The shares of DRAXIS have been included inthe NASDAQ Healthcare IndexÒ (symbol: IXHC) since July 27,2005 and the NASDAQ Global Select MarketSM since July 3, 2006.

 

Our registered office is located at Suite 4700, TD Bank Tower,Toronto Dominion Centre, Toronto, Ontario, M5K 1E6, Canada. Our telephonenumber at this location is 416- 601-7525.

 

The Company’s only manufacturing, research and development facilitiesare located at 16751 Trans-Canada Road, Kirkland, Québec, Canada, H9H 4J4.  Our telephone number at this location is514-694-8220.

 

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

 

**History and Development of the Company**

 

DRAXIS Health Inc. (“DRAXIS”) was incorporated under the name DeprenylResearch Limited on October 13, 1987 under the *CBCA*.  The Company wasfounded principally to engage in the marketing in Canada of prescriptionpharmaceuticals discovered, developed or acquired by Chinoin Pharmaceutical andChemical Works Co. Ltd., the first of which was *ELDEPRYL**®* (selegiline;1-deprenyl), for the treatment of Parkinson’s disease.  We changed our name to DRAXIS Health Inc. in May 1994.

 

We completed an initial public offering of our common shares in February 1988on the Toronto Stock Exchange.  Ourcommon shares were listed on NASDAQ in August 1989.

 

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

 

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

 

By late 1992, we faced considerable uncertainty due to the impendingthreat of generic competition for *ELDEPRYL**®*, which, at thattime, still accounted for almost 100% of our consolidated revenues.  Faced with this as well as other businesschallenges, in 1992 we began the process of recruiting new senior management todevelop and implement a new strategic business plan for the Company to (i) addressthe generic threat to our lead drug by expanding and diversifying ourestablished Canadian pharmaceuticals franchise; (ii) strengthen ourfinancial position; and (iii) diversify from our historical Canadian basethrough the acquisition of niche pharmaceutical products and/ormanufacturing-oriented businesses with international growth potential.

 

17

----

 

In 1993, the leadership of the Company changed with the appointment of Dr. MartinBarkin as President and Chief Executive Officer.  Several measures were taken to strengthen ourfinancial position and to address the threat of generic competition for *Eldepryl**Ò*, including (i) expandingand diversifying our established Canadian pharmaceutical business, and (ii) diversifyingour product mix through the acquisition of niche pharmaceutical products whichthe Company believed had the potential for global growth.

 

In April 1996, a public offering of 3,000,000 common sharesgenerated net proceeds of $8.5 million. In November 1996, we acquired the shares of DAHI that we did notpreviously own through a mandatory share exchange transaction valued at $17.4million.

 

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

 

In December 1997, we licenced the worldwide marketing rights for *Anipryl**Ò* to Pfizer butretained manufacturing rights for the product. Cumulatively to December 31, 2007 $46.4 million has been receivedin upfront and milestone payments, royalties and royalty-related payments fromPfizer.

 

In May 1998, we acquired our current manufacturing facilities inKirkland, Québec for $11.1 million.

 

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

 

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

 

In 2001, we began producing DRAXIMAGE products in our facilities.

 

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

 

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

 

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

 

On April 22, 2004, we issued 3,053,436 units of the Company at apurchase price of $4.82 (CDN$6.55) per unit, for aggregate proceeds net ofrelated expenses of $13.4 million (CDN$18.2 million).  Each unit consisted of one common share ofDRAXIS and one-half of one share purchase warrant.  Each whole warrant entitled the holder toacquire one common share of DRAXIS at a price of 

 

18

----

 

CDN$8.50 at any time prior to April 24,2006.  The warrants were transferable. Holders of warrantsdid not, as such, have any voting rights or other right attaching to the commonshares until the warrants were properly exercised and common shares issuableupon the exercise of the warrants were issued. All warrants expired unexercised on April 24, 2006.

 

*                On April 22,2004, DRAXIS acquired SGF’s 32.7% interest in DRAXIS Pharma for a cashconsideration of $9.6 million (CDN$13 million). DRAXIS used part of the proceeds from the offering completed in April 2004to pay for the acquisition and to repay $3.1 million (CDN$4.2 million) in debtowed by DRAXIS Pharma to SGF and $1.7 million (CDN$2.3 million) in debt owed byDRAXIS Pharma to Investissement Québec. The DRAXIS Pharma senior management interest was also bought so that theCompany became the sole shareholder of DRAXIS Pharma.*

* *

**               **In June 2004, wenegotiated new credit facilities with our bankers, the National Bank of Canada,providing an operating facility of CDN$15 million (or U.S. equivalent), payablewithin 364 days of drawing upon the facility and a term facility of CDN$10million (or U.S. equivalent), repayable in full in three years.  The Company chose not to renew its credit facilitiesupon their scheduled expiration date in June 2007. The Company plans toexplore new credit facility arrangements in conjunction with new businessopportunities. The Company believes that its current cash position and cashflows are sufficient to achieve the Company’s current business plans.

 

*               *In November 2004, wereceived FDA approval for a DRAXIMAGEÒ brand of Iodine-131therapeutic capsules.

 

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

 

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

 

In February 2005,we announced that DRAXIMAGE had received approval from the Dutch regulatoryauthority for its kit for the preparation of Technetium Tc-99m AlbuminAggregated Injection (“MAA Kit”).  Thisapproval allowed DRAXIMAGE to initiate the Mutual Recognition Procedure (“MRP”)in pursuit of further regulatory approvals for the diagnostic imaging productin additional European Union countries.

 

In April 2005,we announced the appointment of Mr. Jean-Pierre Robert as the newPresident of the DRAXIMAGE division effective as of May 9, 2005.

 

In October 2005,we announced the appointment of Mr. Dan Brazier to the newly createdposition of Chief Operating Officer.

 

In November 2005,DRAXIMAGE announced that it would discontinue the manufacture and sale ofimplantable brachytherapy seeds as of December 15, 2005.

 

In January 2006,we announced we had received approval from the FDA for our supplemental drugapplication for Sodium Iodide I-131 Capsules USP, Diagnostic-Oral.  We began selling these capsules in the U.S.in May 2006.

 

In March 2006,we announced that although our product *FIBRIMAGE*Ò hadmet primary end 

 

19

----

 

points in its Phase III clinical trial in Canada, further marketanalysis had shown that new technologies have successfully captured the currentdeep venous thrombosis indications and that there was no longer an economicallyinteresting market opportunity at the time in either the at-risk asymptomaticpatient, or those with symptoms.  Wefurther indicated that we had decided that no significant further work would beconducted in the development of this product for its current indications butother potential opportunities for this product would be explored.  In 2006 and 2007, no other potentialopportunities were uncovered.

 

In November 2006,DRAXIMAGE was approved by the FDA to run two clinical trials using radioactiveIobenguane I-131 Injection (also known as I-131 Metaiodobenzylguanidine orI-131 MIBG) to treat high risk neuroblastoma, a rare form of cancer thataffects mostly infants and young children. These trials are ongoing.

 

In February 2007,DRAXIMAGE announced it had submitted an ANDA to the FDA for its generic kit forthe preparation of Tc-99m Sestamibi for injection (DRAXIMAGEÒSestamibi), a nuclear medicine imaging agent used in MPI to evaluate blood flowto the heart in patients undergoing cardiac tests.  On July 7, 2007, the Company wasinformed by the FDA that it’s ANDA submission was accepted for filing.  On July 25, 2007, DRAXIMAGE announced ithad filed DRAXIMAGEÒ Sestamibi with European regulatoryauthorities.  The Company also filed anA/NDS for DRAXIMAGEÒ Sestamibi on August 17, 2007 withHealth Canada.  On October 11, 2007,the Company was informed by Health Canada that this submission had beenscreened and found acceptable for review. We cannot predict if or when we will receive regulatory approvals tomarket this product.

 

In September 2007,the Company announced it had expanded its existing contract manufacturingrelationship with JJC and entered into a new definitive supplyagreement to provide commercial manufacturing services for a broad portfolio ofmultiple non-sterile specialty semi-solid products currently marketed in theUnited States.

 

In connection withthe supply agreement with JJC, DRAXIS Pharma also signed a credit agreementwith Johnson & Johnson Finance Corporation (“JJFC”) as of September 4,2007 which provides that JJFC shall provide credit facilities of up to $12.2million.  The credit facilities will beused by DRAXIS Pharma solely to finance the acquisition and installation ofequipment and to finance the cost of transfer of the technology required forthe pre-validation work in support of the manufacture by DRAXIS Pharma of theproducts under the supply agreement.

 

On October 31,2007, the Company announced that Dr. Martin Barkin informed the Board ofDirectors that he would retire as President and Chief Executive Officer of theCompany effective December 31, 2007. For the period of January 1, 2008 to January 9, 2009, he willact as a Special Advisor to the Board of the Company.

 

On November 1,2007, DRAXIS announced that the Company was ceasing all further activitiesrelated to its product *INFECTON**Ò* and redeploying its development teams to otherprojects following the results of additional formulations for the product whichindicated that sufficient specificity and sensitivity could not be achieved ina cost effective manner which would be commercially important.

 

On December 20,2007, DRAXIS announced that DRAXIMAGE, its radiopharmaceutical division, hasappointed GE Healthcare, an industry leader in nuclear medicine, as theexclusive distributor of DRAXIMAGE® Sestamibi in the United States.DRAXIMAGE® Sestamibi is a generic kit for the preparation ofTechnetium (Tc-99m) Sestamibi injection, a diagnostic cardiac imaging agentused in myocardial perfusion imaging (MPI) to evaluate blood flow to the heart.  GE Healthcare will be able to sell DRAXIMAGE®Sestamibi once the primary innovator patent expires and marketingauthorizations 

 

20

----

 

are received from the FDA.

 

**Recent Developments**

 

In response to arequest by securities regulators with respect to increased trading in itscommon stock, DRAXIS announced on March 17, 2008 that it is currently inexclusive discussions regarding a potential transaction that could lead to asale of the Company.  There can be nocertainty at this stage that these discussions will continue or result in anyagreement or transaction or result in pricing that will be acceptable either tothe Board of Directors of the Company or to its shareholders.

 

The Board ofDirectors of DRAXIS appointed Mr. Dan Brazier, the Company’s ChiefOperating Officer since October 2005, as the new President and ChiefExecutive Officer effective January 1, 2008 and Mr. Jean-PierreRobert as Chief Operating Officer of DRAXIS. Mr. Robert is also Presidentof DSPI.

 

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

 

**Business Strategy**

 

                We believe that both DRAXIMAGE and DRAXIS Pharma havesignificant long-term growth potential and have invested considerable financialand management resources in developing these businesses.

 

Our general businessstrategy is to:

 

·                  Focus on specialty pharmaceutical markets in which wecan develop and sustain a competitive advantage.

 

·                  DRAXIS has focused its operations on two corebusinesses:  radiopharmaceuticals andspecialty pharmaceutical contract manufacturing.  Both businesses target highly differentiated,specialized markets which feature significant regulatory requirements andspecialized manufacturing requirements and standards.

 

·                  Develop new pharmaceutical products and servicesconsistent with our strengths and capabilities.

 

·                  DRAXIS has established a growing franchise in thehighly differentiated radiopharmaceutical segment with a portfolio of 22currently marketed products plus innovative proprietary products in variousstages of development, including DRAXIMAGEÒSestamibi for which DRAXIMAGE filed an ANDA with the FDA in February 2007,a submission to European authorities in July 2007 and an A/NDS in Canadain August 2007 and MOLY-FILLÔ, a “next-generation” version of aTechnetium Tc-99m Generator. In addition to our radiopharmaceutical platform,our expanding lyophilization capability positions us to offer new services tocustomers and to take advantage of growth opportunities in contractmanufacturing.

 

·                  Pursue growth opportunities with international marketpotential.

 

·                  We are leveraging our capabilities, experience andregulatory compliance in radiopharmaceuticals and manufacturing to expand ourproduct and service offerings in the United States, Europe and otherinternational markets.

 

21

----

 

·                  Leverage alliances with customers.

 

·                  We are pursuing multiple opportunities with new andexisting customers.  Meeting the strictquality and service standards of such customers positions us to expand on theserelationships in both our radiopharmaceuticals and pharmaceutical contractmanufacturing businesses.

 

Ourprimary operational focus for 2008 continues to be: (i) improvingnear-term financial and operational performance of our radiopharmaceutical andmanufacturing businesses through increasing sales of existing products andservices, improving manufacturing efficiency and effectiveness, and obtainingadditional regulatory approvals; and (ii) securing and advancing our basefor long-term growth through the development of our existing product pipelineas well as identifying new business opportunities that are consistent with ourcapabilities and that contribute to the long-term value of the Company.

 

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

** **
| **Geographic Segmentation** | ** **   | **2007**     | ** **   | **2006**     | ** **   | **2005**     | ** **   |
|-----------------------------|--------------|--------------|--------------|--------------|--------------|--------------|--------------|
| ***REVENUES(2)***           | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** | *** *** |
| Canada                      | ** **   | **$**        | **36,061**   |         | $            | 39,891       |         | $ | 39,026 |   |
| United States               | ** **   | **40,336**   |         | 47,900       |         | 39,612       |         |
| Other                       | ** **   | **2,463**    |         | 1,176        |         | 795          |         |
|                        | ** **   | **$**        | **78,860**   |         | $            | 88,967       |         | $ | 79,433 |   |

----

*(1)          SeeNote 19 in our 2007 Consolidated Financial Statements and Notes beginning on page F-1*

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

* *

 
| **Product Sales Revenues   By Major Product Groups** | *** *** | **2007**   | *** *** | **2006** | *** *** | **2005** | *** *** |
|------------------------------------------------------|--------------|------------|--------------|----------|--------------|----------|--------------|
| Radiopharmaceuticals                                 | ** **   | **$**      | **23,216**   |     | $            | 21,508   |         | $ | 19,290 |   |
| Manufacturing -  Sterile                             | ** **   | **38,620** |         | 51,529   |         | 41,488   |         |
| Manufacturing -  Non-Sterile                         | ** **   | **16,306** |         | 13,202   |         | 13,255   |         |
| Corporate and  Other                                 | ** **   | **686**    |         | 295      |         | 499      |         |
| Inter-segment  eliminations                          | ** **   | **(2,756** | **)**        | (2,989   | )            | (1,543   | )            |
|                                                 | ** **   | **$**      | **76,072**   |     | $            | 83,545   |         | $ | 72,989 |   |

 

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

 

DRAXIMAGE’s principal raw materials are radioactive isotopes,particularly radioactive iodine isotopes, that are used to label othercompounds that act as carriers or molecular targeting agents.  The isotopes are obtained from companies andagencies that are licensed by governmental regulators to produce purifiedradioactive chemicals.  Radioactivematerials, by their nature, decay over time — some rapidly and some moreslowly, depending on specific isotopes. Therefore, DRAXIMAGE receives shipments of chemical-grade radioisotopesseveral times each week and converts these to finished pharmaceutical-gradeproducts within days or weeks.  Whileprices of selected isotopes can be somewhat volatile over the medium term,DRAXIMAGE endeavors to negotiate long-term supply arrangements with appropriatesuppliers, especially for the more important isotopes such as radioactiveIodine.

 

22

----

 

 

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

 

**Contract Manufacturing (DRAXIS Pharma)**

** **

Contract manufacturing accounted for 69.7% of our consolidated revenuesfor the year ended December 31, 2007. Our DRAXIS Pharma division is responsible for our contractpharmaceutical manufacturing and has capabilities in a broad range of dosageforms, specializing in liquid and lyophilized (freeze-dried) injectables andother sterile products.  Operating out ofa cGMP-compliant 247,000-square-foot facility located in Kirkland, Québec,DRAXIS Pharma manufactures pharmaceutical products for DRAXIMAGE, as well asfor over 26 other pharmaceutical clients in many international jurisdictions.

 

Key business development transactions involvingDRAXIS Pharma have included:

 

·                  May 1998 —$11.1 million acquisition of DRAXIS Pharma’s pharmaceutical manufacturingfacility.

 

·                  July 1999 —signing of a five-year manufacturing supply agreement with Warner-LambertCanada Inc. (which then became known as Pfizer Consumer Healthcare, a divisionof Pfizer Canada Inc.).  In September 2005,the Company announced that Pfizer Canada had renewed this agreement for a threeyear term effective January 1, 2005. The agreement was subsequently renewed for a one-year period ending December 31,2008.  The parties are presentlynegotiating a possible renewal of the agreement.  On December 20, 2006, DRAXIS Pharma wasadvised that Johnson & Johnson, Inc. (“J&J”) had purchasedPfizer’s consumer healthcare business and that the agreement had been assignedto J&J.

 

·                  February 2000— sale of 34.1% equity interest to SGF and DRAXIS Pharma senior management fornet proceeds of $5.4 million.

 

·                  December 2001— signing of a long-term manufacturing and supply agreement for the renewal andexpansion of DRAXIS Pharma’s existing contract manufacturing relationship withGSK.

 

·                  March 2003 —initiation of production under a manufacturing and supply agreement with BoneCare International, Inc. (now Genzyme) for Hectorol® Injection.

 

·                  April 2004 —acquisition by the Company of SGF’s 32.7% interest in DRAXIS Pharma andrepayment of $3.1 million (CDN$4.2 million) in debt owed by DRAXIS Pharma toSGF and $1.7 million (CDN$2.3 million) in debt owed by DRAXIS Pharma toInvestissement Québec.  The DRAXIS Pharmasenior management interest was also bought so that the Company became the soleshareholder of DRAXIS Pharma.

 

·                  September 2007— theCompany announced it had expanded its existing contract manufacturingrelationship with JJC and entered into a new definitive supply agreement 

 

23

----

 

to manufacturea broad portfolio of multiple non-sterile specialty semi-solid productscurrently marketed in the United States.

 

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

 

Since DRAXIS acquired DRAXIS Pharma, DRAXIS Pharma’s revenues have risenfrom $6.1 million for the eight-month period ended December 31, 1998 to$54.9 million for the year ended December 31, 2007.

 

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

 

·                  obtaining andmaintaining all required regulatory approvals for DRAXIS Pharma’s manufacturingfacility;

 

·                  securingadditional manufacturing contracts with existing and new customers;

 

·                  focusing onDRAXIS Pharma’s distinctive capabilities in sterile and lyophilized productmanufacturing;

 

·                  providingmanufacturing and related services to DRAXIS’ other businesses; and

 

·                  focusing onoperational excellence, including regulatory compliance, cost-effectiveness andcustomer service.

 

24

----

 

### ** **

### **Overview of Pharmaceutical Contract Manufacturing**

### ** **

In a report prepared by TD Newcrest, a Division ofTD Securities Inc. (Equity Research) and dated July 26, 2005 entitled“DRAXIS Health — Initiating Coverage”, it was estimated that the secondary, ordosage-form, manufacturing portion of the $550 billion global pharmaceuticalmarket was $65 billion, with approximately $10 billion of that beingoutsourced.  Since 2005, we believe thatthe contract manufacturing market for pharmaceuticals has continued to grow.

 

The reasons pharmaceutical companies outsourcemanufacturing include:

 

·                  productivity benefits — plant utilization rates in the pharmaceuticalindustry are declining and have created increased need to lower operatingcosts;

·                  moving assets off the balance sheet — contract manufacturers are asolution to high levels of industry assets tied up in under-utilizedfacilities;

·                  leveraging external expertise — third-party contractors provide alogical route to specialist services and access to updated technologies; and

·                  pharmaceutical industry consolidation — continuing mergers will likelyforce rationalization of manufacturing capacity.

 

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

 

DRAXIS Pharma believes that the key competitive factors in the contractmanufacturing 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 afull range of quantities — from small pilot batches often required for clinicaltrials to larger commercial quantities.

 

### **Competition**

### ** **

DRAXIS Pharma competes with pharmaceutical companies that have in-housemanufacturing capabilities as well as with third-party contract manufacturers,including Hospira Inc., Boehringer Ingelheim GmbH, Catalent Pharma SolutionsInc., Hollister-Stier Laboratories LLC, DPT Laboratories Ltd, Haupt Pharma AG,Patheon Inc. and DSM Pharmaceuticals, Inc.

 

### **Manufacturing Capabilities**

### ** **

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

 

In 2006 and 2007, the organization of this contract manufacturingbusiness was further refined as we implemented separate business unitaccountability for sterile and non sterile product operations to achieve aflatter, more responsive organization.

 

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

 

25

----

 

#### ***SterileLyophilization***

#### *** ***

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

 

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

 

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

 

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

 

The second lyophilization unit completed validationand began commercial production during 2005. At optimum configuration and given the appropriate mix of lyophilizationcycles, the second lyophilizer could potentially allow us to approximatelytriple existing lyophilization capacity over time.  We did not achieve full capacity utilizationof the new lyophilizer in 2007; however the transfer of some current productsand the introduction of new products will continue to occur in 2008 and beyond.

 

#### ***OtherSterile Products***

#### *** ***

The Sterile Products Department (“SPD”) includes preparation andpharmaceutical areas with manufacturing, filling and inspection rooms for themanufacture of injectable liquids, ophthalmic and otic products.  We believe that DRAXIS Pharma possesses oneof the most modern facilities of its kind in Canada approved for themanufacture of sterile prescription pharmaceuticals for Canada, the UnitedStates and other global markets.

 

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

 

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

 

The processes that are incorporated in the operation include asepticmanufacturing and filling, terminal sterilization, clean in place (“CIP”), andsterilize in place (“SIP”).  The dosageforms/product 

 

26

----

 

types manufactured include solutions inampoules and vials, suspensions and solutions in drop dose form and ointmentsin tubes.  The department currently hasthe capacity to fill vials ranging in size from 1 ml to 30 ml, ampoules rangingin size from 1 ml to 10 ml, and 3.5 g to 4.5 g tubes.

 

#### ***Ointments,Creams and Liquids***

#### *** ***

The 17,420-square-foot Ointments, Creams and Liquids (“OCL”) Departmentoffers substantial flexibility in production scale.  Production of ointments and creams utilizes agravity-fed system and incorporates segregated wash areas and clean storageareas for equipment.

 

Batch capability in the OCL Department varies from 200 to 18,000 litersand incorporates three dedicated packaging lines.  Interconnecting tanks can be utilized whererequired, thereby providing production flexibility.  Fully automatic validated CIP systems ensurethe purity of each customer’s product. Product is pumped to two of the packaging lines and gravity fed to theother two lines.  Dosage forms/producttypes manufactured include creams, ointments, lotions, syrups, shampoos, gelsand suspensions.

 

During 2007, capacity in the OCL Department was increased by nearlyfifty percent (50%) to accommodate the manufacturing of additional productsunder a new contract with JJC for a broad portfolio of non-sterile specialtysemi-solid products, which was announced in September of 2007.

 

#### ***SolidDosage***

#### *** ***

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

 

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

 

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

 

#### ***Packaging***

#### *** ***

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

 

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

 

During the second half of 2007, construction was initiated on a secondfacility in Ste-Anne-de-Bellevue, within 10 miles of the current facility inKirkland, Québec.  This new facility willbe leased 

 

27

----

 

from the developer and will initially bededicated to secondary packaging and warehousing of products and componentsrelated to the new contract signed in September 2007 with JJC for themanufacture of a broad portfolio of non-sterile specialty semi-solidproducts.  This additional packagingfacility is expected to be completed during 2008 and operating prior to thestart of commercial production under the contract with JJC, which is scheduledfor the beginning of 2009.

 

### **Regulatory**

### ** **

The manufacturing of our existing and potential products are subject toregulation and approval by the TPD of the HPFBI and other authorities in Canadaand by numerous federal, state and local government authorities in the UnitedStates, including the FDA.  Similarregulatory requirements exist in Europe and other countries.

 

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

 

DRAXIS Pharma has a strong regulatory track record.  This includes 16 successful audits of ourfacilities in 2007 (3 regulatory inspections and 13 client audits) and 13successful audits of our facilities in 2006 (0 regulatory inspection and 13client audits).

 

### **Warehousing and Distribution**

### ** **

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

 

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

 

### **Customers**

### ** **

#### ***Third-PartyContract Manufacturing***

#### *** ***

DRAXIS Pharma manufactures prescription and non-prescriptionpharmaceutical products for more than 26 pharmaceutical companies (excludinginter-company manufacturing) pursuant to manufacturing supply contracts.  Such contract manufacturing servicesrepresented 69.7% of our consolidated revenues for the year ended December 31,2007.  A significant portion of thiscontract manufacturing business is focused on our three largest customers, GSK,Genzyme and Johnson & Johnson Inc. (including JJC) which togetherrepresented 45% of our consolidated revenues in 2007.  See “Risk Factors — Risks Related to ourCompany — A Significant Portion of our Business is Dependent on a Small Numberof Key Customers”.

 

28

----

 

In April 2002, DRAXIS Pharma entered into an agreement with BoneCare International, Inc. (now Genzyme) to produce Hectorol® Injection for sale in the U.S., and we begancommercial shipments of the sterile injectable product in March 2003.  A manufacturing and supply agreement wassigned on March 3, 2003.  The agreementis for a five-year term and was automatically renewed at the end of its termfor a one year period to March 2009. The contract requires either party to give written notice of non renewalto the other party one year prior to the end of the term or the end of arenewal period.  To date, the Company hasnot received notice of non renewal.

 

On December 18,2001, DRAXIS Pharma finalized supply and related agreements with GSK for therenewal and expansion of an existing contract manufacturing relationshipbetween the companies.  The productstransferred to DRAXIS Pharma were all established, sterile products marketed byGSK in multiple international markets. In 2002, a prescription sterile injectable product for the U.S. marketwas added under this contract and commercial production of this productcommenced in the second quarter of 2002. During 2002, site transfer and related activities associated with theother GSK products were undertaken and production started in the second quarterof 2003 and ramped up through 2003 and 2004 with full production of allproducts achieved by the end of 2004. DRAXIS Pharma will manufacture the products covered by the agreementuntil it receives a termination notice from GSK which may be given by atwo-year advance written notice given on or after December 31, 2007.  To date, the Company has not received anytermination notice.

 

On July 1, 1999, DRAXIS Pharma entered into a five-yearmanufacturing and supply agreement with Warner-Lambert Canada Inc. (which thenbecame known as Pfizer Consumer Healthcare, a Division of Pfizer Canada Inc.)covering several non-prescription products for the Canadian market, includingPolysporin®, Sudafed® and Actifed®. Manufacturing of these products commenced in early 2000.  On September 1, 2005, DRAXIS announcedit had renewed its agreement with Pfizer Canada for a three-year term,effective January 1, 2005.  On December 20,2006, DRAXIS Pharma was advised that J&J had purchased Pfizer’s consumerhealthcare business and that the agreement had been assigned to J&J.  The agreement was subsequently renewed for aone-year period ending December 31, 2008.

 

During the third quarter of 2007, the Company announced it had expandedits existing contract manufacturing relationship with JJC and entered into anew definitive supply agreement to manufacture a broad portfolio of multiplenon-sterile specialty semi-solid products currently marketed in the UnitedStates.  This new multi-year contractruns to the end of 2013 and may be extended beyond that date. It includesapproximately two years of manufacturing site transfer and process validationactivities followed by five years of commercial production, that is scheduledto begin in 2009. We expect commercial production to generate incrementalrevenues in excess of $120 million over the five year period of 2009 through2013. The transfer of equipment and production technologies, currently inprogress, is expected to generate additional cumulative revenues during 2007and 2008 of approximately $6 million to $8 million.  In 2007, revenues of $2.6 million weregenerated from this contract.  A copy ofthe supply agreement is filed as Exhibit 4.68 to this Annual Report (Form 20-F).

 

In connection with the supply agreement with JJC, DRAXIS Pharma alsosigned a credit agreement with Johnson & Johnson Finance Corporation(“JJFC”) as of September 4, 2007 which provides that JJFC shall providecredit facilities of up to $12.2 million. The credit facilities will be used by DRAXIS Pharma solely to financethe acquisition and installation of equipment and to finance the cost oftransfer of the technology required for the pre-validation work in support ofthe manufacture by DRAXIS Pharma of the products under the supplyagreement.  A copy of the creditagreement is filed as Exhibit 4.69 to this Annual Report (Form 20-F).

 

29

----

 

#### ***Inter-Company***

#### *** ***

Beginning in early 2002, DRAXIS Pharma became the FDA-approvedmanufacturing site for DRAXIMAGE’s lyophilized Tc-99m kits.  In addition, DRAXIS Pharma has been qualifiedas the manufacturing site for *ANIPRYL®*tablets.

 

### **Employees**

### ** **

As at December 31, 2007, DRAXIS Pharma had 389 employees(representing approximately 78% of the Company’s employees), consisting of: 51managerial employees, 54 clerical employees, 62 quality operations employees,17 technical employees and 205 unionized hourly employees.  The unionized hourly employees arerepresented by the United Food & Commercial Workers InternationalUnion, Local 291 (AFL-CIO).  A collectiveagreement with a five-year term to April 30, 2008 was ratified in February 2004.  DRAXIS Pharma currently has no significantunresolved issues with the union and is presently preparing to negotiate a newcollective agreement with the union.  See“Risk Factors — Risks Related to our Company — Our Business Could be Harmed ifthere were a Dispute or Disruption with our Unionized Employees”.

 

### **Former Equity Partners**

### ** **

From February 2000 to April 2004, SGF and senior management ofDRAXIS Pharma held a non-controlling equity interest in DRAXIS Pharma Inc.  In 2002 and 2003, DRAXIS Pharma Inc. (nowknown as DRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.)repurchased and cancelled shares held by a former DRAXIS Pharma employee andmembers of DRAXIS Pharma’s management team in exchange for cash and settlementof existing loans.  In April 2004,the Company acquired from SGF its 32.7% interest in DRAXIS Pharma and alsorepaid $3.1 million (CDN$4.2 million) in debt owed by DRAXIS Pharma toSGF.  The DRAXIS Pharma senior managementinterest was also bought at that time so that the Company became the soleshareholder of DRAXIS Pharma.

 

**Radiopharmaceuticals**

** **

Radiopharmaceuticals accounted for 29.4% of our consolidated revenuesfor the year ended December 31, 2007. Our DRAXIMAGE division is responsible for discovering, developing,manufacturing, and marketing our diagnostic imaging and therapeuticradiopharmaceutical products for the global nuclear medicine marketplace.  Nuclear medicine entails the use of radioactivedrugs (radiopharmaceuticals) for imaging and therapeutic purposes.  The energy released as these products decaycan be harnessed to:  (i) elicit avisual representation of various organs and tissues (nuclear imaging); or (ii) destroycancerous cells (radiotherapy).  Productscurrently marketed by DRAXIMAGE include a line of lyophilized Technetium Tc-99mkits (“Tc-99m”) used in nuclear imaging procedures and a line of imaging andtherapeutic products labeled with a variety of isotopes, including iodine.

 

As announced on February 2, 2007, DRAXIMAGE submitted an ANDA tothe FDA for its generic kit for the preparation of Tc-99m Sestamibi forinjection (“DRAXIMAGEÒ Sestamibi”), a nuclearmedicine imaging agent used in myocardial perfusion imaging (“MPI”) to evaluateblood flow to the heart in patients undergoing cardiac tests.  On July 7, 2007, the Company wasinformed by the FDA that its ANDA submission was acceptable for filing.  On July 25, 2007, DRAXIMAGE announced ithad filed DRAXIMAGEÒ Sestamibi with Europeanregulatory authorities.  The Company alsofiled an Abbreviated New Drug Submission (“A/NDS”) for DRAXIMAGEÒ Sestamibi on August 17,2007 with Health Canada.  On October 11,2007, the Company was informed by Health Canada that this submission had beenscreened and found acceptable for review. See Risks Factors — Risks related to our industry — 

 

30

----

 

We may not be able to get timely regulatory approvalfor our products and we must comply with regulatory requirements to manufactureand market our products.

 

According to BIO-TECH SYSTEMS, in 2007 there were 8.3 million nuclearcardiology procedures (out of 17.5 million total nuclear procedures) in theU.S.A.  Sales of nuclear cardiologyproducts were $1,291.6 million in 2007 (67.0% of total diagnosticradiopharmaceutical sales).  Sales ofCardioliteÒ, the largestsingle revenue producer, were $360.7 million (55% of cardiology perfusionsales) followed by MyoviewÔ with sales of $202.3 million(31% of cadiology perfusion sales). CardioliteÒ is the productof Lantheus Medical Imaging (formerly Bristol-Myers Squibb Imaging).  MyoviewÔ is the productof GE Healthcare.

 

Once DRAXIMAGEÒ Sestamibi is approved,DRAXIMAGE plans to enter the MPI market after the key patent for the currentlymarketed Tc-99m Sestamibi product expires, which is expected to be in 2008 forthe United States, 2009 for Canada and from 2007 and onwards in variousEuropean countries, and after it receives regulatory approval for the sale of DRAXIMAGEÒ Sestamibi.

 

DRAXIMAGE also hasa number of other products in development. DRAXIMAGE has received approval in November 2006from the FDA to run two clinical trials in the U.S. using radioactiveIobenguane I-131 Injection (also known as 131 I-metaiodobenzylguanidine, orI-131 MIBG) to treat high-risk neuroblastoma, a rare form of cancer thataffects mostly infants and young children. Given the inherent uncertainties associated with new drug development,it is difficult to predict if, or when, this product will achievecommercialization.

 

DRAXIMAGE is developingMOLY-FILLÔ, a “next-generation” version of aTechnetium Tc-99m Generator, which is the source of Technetium Tc-99m invirtually every radiopharmacy worldwide. According to the Bio-Tech Systems Report 270 (issued inNovember 2007), entitled “The U.S. Market for DiagnosticRadiopharmaceuticals”, the generator market in the United States is currentlyestimated at approximately $166.7 million and is growing at approximately 5%annually.  Nearly 85% of generators arelocated in radiopharmacies and the rest are in other institutions such ashospitals and clinics.

 

Technetium (Tc-99m) isone of the most widely used radiopharmaceuticals. Due to its short half-life,it has to be produced on site or nearby by generators shipped with a longerhalf-life mother isotope, the molybdenum (Mo99).  In other words, generators are used toproduce technetium on site at the hospital or radiopharmacy. A generatorconsists of a column loaded with Mo99, encased within lead shielding designedto provide protection from radiation.  Itcan typically provide Tc 99m for a period of approximately one week, dependingon the degree of usage by the radiopharmacy. During the fourth quarter of 2007, the Company completed a test evaluationof the prototype version of this product and the results of the evaluation willcontribute to the continuing product development process.  DRAXIMAGE is in discussions with potentialdevelopment, marketing and manufacturing partners for its MOLY-FILLÔgenerator.

 

See “Risk Factors — Risks Related to our Industry — If the Market DoesNot Accept our Products Currently in Development, our Business Could BeHarmed”.

 

Founded in 1950 as a division of Charles E. Frosst & Co., thepredecessor business to DRAXIMAGE pioneered and became a leader in the medicalapplication of nuclear technology after assuming the development function fromAtomic Energy of Canada Ltd.  Followingthe 1965 acquisition of Charles E. Frosst & Co. by Merck Inc.(“Merck”), the business continued operations as a division of Merck’s Canadiansubsidiary, Merck Frosst Canada and Co. (“Merck Frosst”), until its acquisitionby 

 

31

----

 

DRAXIS in 1997. As part of the acquisition, the Company retained all of the business’smanagers, scientists and employees as well as its existing products andintellectual property.

 

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

 

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

 

Key business development transactions involving DRAXIMAGE have included:

 

·                  July 1997 —$8.6 million acquisition of the Canadian radiopharmaceutical division of MerckFrosst, which began operations through DRAXIMAGE Inc. (now known as DRAXIMAGE,a division of DRAXIS Specialty Pharmaceuticals Inc.).

 

·                  October 1999— licensing from Isogenic Science Ltd. (“Isogenic”) of the rights to Isogenic’sproprietary technology related to radioactive brachytherapy implants (“*BrachySeed*®”) for the treatment of various localizedcancers.

 

·                  July 2000 —signing of a non-exclusive distribution agreement with Syncor InternationalCorporation (now known as Cardinal Health 414, LLC) for the production of a kitfor the preparation of Sodium Iodide I-131 Capsules and Oral Solution indicatedfor the treatment of thyroid cancer and hyperthyroidism for sale in the U.S.

 

·                  December 2000— entering into license, distribution and supply agreements for *BrachySeed*® for the U.S. market with CytogenCorporation.  In April 2003, thislicense was terminated.

 

·                  March 2001 —licensing from BTG International Limited (formerly known as the BritishTechnology Group) of the rights to *INFECTON**®*, an agent forimaging infection.  In November 2007,DRAXIMAGE announced it would discontinue all work related to *INFECTON**Ò*.

 

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

 

·                  May 2003 —expansion of agreements with Isogenic for global rights to proprietarytechnology related to brachytherapy implants. November 2005 — DRAXIMAGE announced it would discontinue themanufacture and sale of implantable brachytherapy seeds as of December 15,2005.

 

·                  July 2003 —extension and expansion of strategic partnership with Bristol-Myers SquibbCanada Co. (“Bristol-Myers Canada”) for the marketing and distribution of 

 

32

----

 

 

radiopharmaceutical products in Canada.  This agreement was terminated as ofDecember 31, 2007.

 

·                  August 2003— amendment to the July 2000 agreement with Cardinal Health 414, LLC toenable DRAXIMAGE to distribute the new radioactive Iodine I-131 kit product toindependent radiopharmacies in the U.S.

 

·                  February 2005— announcement that DRAXIMAGE had received approval from the Dutch regulatoryauthority for its kit for the Preparation of Technetium Tc-99m AlbuminAggregated Injection (“MAA Kit”).  Thisapproval allowed DRAXIMAGE to initiate the Mutual Recognition Procedure (“MRP”)in pursuit of further regulatory approvals for the diagnostic imaging productin additional European Union countries.

 

·                  April 2005 —announcement of the appointment of Mr. Jean-Pierre Robert as the newPresident of the DRAXIMAGE division.

 

·                  January 2006— DRAXIMAGE announced it had received approval from the FDA for itssupplemental new drug application for Sodium Iodide I-131 Capsules USP,Diagnostic-Oral.

 

·                  November 2006— DRAXIMAGE announced it had been approved by FDA to run two clinical trialsusing radioactive Iobenguane I-131 Injection (also known as I-131metaiodobenzylguanidine or I-131 MIBG) to treat high risk neuroblastoma, a rareform of cancer that affects mostly infants and young children.

 

·                  February 2007— DRAXIMAGE announced it had submitted an ANDA to the FDA for its generic kitfor the preparation of DRAXIMAGEÒ Sestamibi.  On July 7, 2007, the Company wasinformed by the FDA that its ANDA submission was acceptable for filing.

 

·                  On July 25,2007, DRAXIMAGE announced it had filed DRAXIMAGEÒ Sestamibi withEuropean regulatory authorities.

 

·                  The Company alsofiled an Abbreviated New Drug Submission (“A/NDS”) for DRAXIMAGEÒ Sestamibi on August 17,007 with Health Canada.  On October 11,2007, the Company was informed by Health Canada that this submission had beenscreened and found acceptable for review.

 

·                  December 2007— DRAXIMAGE appointed GE Healthcare as the exclusive distributor of DRAXIMAGEÒ Sestamibi in theUnited States. DRAXIMAGE granted GE Healthcare the exclusive right to market,distribute and sell its generic DRAXIMAGEÒ Sestamibi in theU.S. market and through its U.S. and Canadian radiopharmacy network once theprimary innovator patent expires and marketing authorizations are received fromthe FDA and Health Canada.  Furthermore,GE Healthcare agreed to purchase Technetium 99m Sestamibi injectionsexclusively from DRAXIMAGE.  The initialterm of the distribution agreement is for a minimum of three years followingFDA approval of the DRAXIMAGEÒ Sestamibi.

 

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

 

33

----

 

·                  Increasing themarket penetration of its radioactive products, particularly in the U.S.;

 

·                  Increasinginternational sales of its key Tc-99m kits and Iodine I-131 products,particularly in Europe, but also in other global markets;

 

·                  Timely,cost-effective development of its portfolio of proprietary, innovative imagingand therapeutic radiopharmaceutical products; and

 

·                  Identifying andcapitalizing on additional new business opportunities and strategicpartnerships which are consistent with DRAXIMAGE’s capabilities, including themonitoring of products that will come off patent protection in key markets thatcan be manufactured, marketed and sold by DRAXIMAGE and monitoring productsthat are owned by third parties and which could be divested in the consolidationthat is taking place in the radiopharmaceutical industry.

 

### **Overview of Radiopharmaceuticals**

 

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

 

*Diagnostic Imaging Applications*

 

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

 

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

 

Nuclear medical imaging procedures are established and trusted medicalprocedures with many years of safe and effective use.  Most procedures are non-invasive, are performedwith a minimum of discomfort and inconvenience to the patient and are normallyless costly and involve less risk than other currently available high-techalternative techniques.

 

34

----

 

#### ***TherapeuticApplications***

 

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

 

·                  various sodiumiodide I-131 products for the diagnosis and treatment of thyroid cancer andhyperthyroidism;

 

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

 

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

 

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

 

### **Competition**

 

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

 

Companies with significant radiopharmaceutical operations includeLantheus Medical Imaging (formerly Bristol-Myers Squibb Imaging), GEHealthcare, Covidien, CISbio, and Bracco S.p.A.  In addition, there are anumber of companies that are developing and/or marketing otherradiopharmaceutical products, including MDS Nordion Inc., Immunomedics, Inc.,IBA Molecular, Cytogen Corporation, International Isotopes Inc. and MolecularInsights Pharmaceuticals, Inc.

 

### **Marketed Products**

 

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

 

35

----

 

#### ***RadioactiveProducts***

 

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

 

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

 
| **Product**                                                                                | ** ** | **Indication**                          | ** ** | **Principal****Markets** |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|--------------------------|
| Imaging Products                                                                           |       |                                    |       |                     |
| 51Chromate  Injection, USP                                                                 |       | Measurement of blood volume             |       | Canada                   |
| 57Co-Cyanocobalamin  Capsule USP                                                           |       | Diagnosis of Vitamin-B12  malabsorption |       | Canada                   |
| 57Co-Standard  Cobalt Reference Solution                                                   |       | Reference for 57Co-Cyanocobalamin       |       | Canada                   |
| 111In-Diethylene  Triamine Pentacetic Acid Injection (DTPA)                                |       | Cisternography                          |       | Canada                   |
| 111In-Indium  Chloride Sterile Solution                                                    |       | Labeling of peptides and  antibodies    |       | Canada                   |
| 131I-Sodium Iodide  Diagnostic Capsules, Oral                                              |       | Imaging of thyroid disorders            |       | Canada/U.S.              |
| 131I-Sodium Iodide  Diagnostic Solutions, Oral                                             |       | Imaging of thyroid disorders            |       | Canada                   |
| 131I-meta-iodobenzylguanidine                                                              |       | Adrenal imaging                         |       | Canada                   |
| 125I-Iodinated  Albumin Injection, USP                                                     |       | Measurement of blood and  plasma volume |       | Canada                   |
| 133Xe-Xenon Gas                                                                            |       | Lung ventilation studies                |       | Canada                   |
|                                                                                       |       |                                    |       |                     |
|                                                                                       |       |                                    |       |                     |
| Therapeutic Products                                                                       |       |                                    |       |                     |
| 131I-Sodium Iodide  Therapeutic Solutions, Oral and Intravenous                            |       | Treatment of thyroid disorders          |       | Canada                   |
| 131I-Sodium Iodide  Therapeutic Capsules Oral                                              |       | Treatment of thyroid  disorders         |       | Canada/U.S./ Denmark*    |
| Kit for the Preparation of  Sodium Iodide I-131 Capsules and Solution USP Therapeutic Oral |       | Treatment of thyroid  disorders         |       | U.S.                     |
| 32P-Sodium  Phosphate Solution, USP                                                        |       | Treatment of polycythemia               |       | Canada                   |

----

*This product is approved for sale in Denmark, however it is notcurrently sold in that country as the Company is seeking distributors for same.

 

36

----

 

*Sodium Iodide I-131 Radiotherapy*

 

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

 

In January 2003, DRAXIMAGE received FDA approval to produce andmarket a new radiopharmaceutical kit product for the preparation of SodiumIodide I-131 Capsules and Oral Solution for the treatment of thyroid cancer andhyperthyroidism.  This was the first suchproduct on the market that allows physicians and radiopharmacists to prepare anFDA-approved I-131 gelatin capsule or oral solution.  In March 2003, DRAXIMAGE launched thenew kit product and initiated shipments to the Nuclear Pharmacy Services groupof Cardinal Health 414, LLC, under a five-year, non-exclusive distributionagreement for the product for the United States and its possessions.  As of 2003, this product was made availableto other customers and distributors in the U.S.

 

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

 

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

 

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

 

#### ***Non-RadioactiveProducts***

 

DRAXIMAGE currently markets the following non-radioactive products. Allproducts listed have received approval for sale by the applicable regulatorybody in the territory in which the product is sold.

 
| **Product**                                                                                          | ** ** | **Indication**                                                                  | ** ** | **Principal  Markets**                                                   |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|
| Tc-99m  Kits                                                                                         |       |                                                                            |       |                                                                     |
| 99mTc-MarcoAggregated  Albumin Kit (“MAA”)                                                 |       | Diagnosis of lung perfusion                                                     |       | U.S./Canada/ Netherlands/  Belgium/ Austria*/ Germany*/ UK*/ Luxembourg* |
|                                                                                                 |       |                                                                            |       |                                                                     |
| 99mTc-Diethylene  TriaminePentacetic Acid Kit (“DTPA”) Stabilized with p-Aminobenzoic Acid |       | Diagnosis of kidney function,  blood pool imaging and lung ventilation function |       | U.S./Canada                                                              |
|                                                                                                 |       |                                                                            |       |                                                                     |
| 99mTc-Calcium  Glucoheptonate Kit                                                                    |       | Diagnosis of kidney function                                                    |       | U.S./Canada                                                              |

 

37

----

 
| **Product**                                                                                 | ** ** | **Indication**                                                 | ** ** | **Principal  Markets**        |
|---------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------|
| 99mTc-MethyleneDiphosphonic  Acid Kit (“MDP”) Stabilized with p-Aminobenzoic Acid |       | Diagnosis of inflammatory and  neoplastic bone disease         |       | U.S./Canada/ Netherlands/ UK* |
| 99mTc-Calcium  Gluceptate Kit                                                               |       | Diagnosis of kidney function  and red blood cell imaging agent |       | Canada                        |

----

*These Productsare approved for sale in these countries, however they are not currently soldin these countries as the Company is seeking distributors for same.

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

 

DRAXIMAGE’s major non-radioactive products are its MDP, DTPA and MAATc-99m diagnostic imaging kits.  Whilethese products would technically be classified as generic pharmaceuticalproducts, DRAXIMAGE’s versions are proprietary and are sold under the DRAXIMAGEÒ trademark orthat of its local distributors.  Allthree of these products feature a proprietary formulation that providesadditional shelf life following reconstitution compared to competitiveproducts.

 

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

 

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

 

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

 

### **Products under Development**

 

As of March 18, 2008, DRAXIMAGE had the following products underdevelopment:

 
| **Product**                                  | ** ** | **Status**     | ** ** | **Indication**     |
|----------------------------------------------|------------|----------------|------------|--------------------|
| Imaging Products                             |       |           |       |               |
| MOLY-FILLÔ Technetium  Tc-99m Generator |       | Development    |       | Tc-99m for imaging |
| Therapeutic Products                         |       |           |       |               |
| I-131 MIBG                                   |       | Phase I (U.S.) |       | neuroblastoma      |

 

38

----

 
| **Product**      |   | **Status**      |   | **Indication** |
|------------------|--------|-----------------|--------|----------------|
| Imaging Products |   |            |   |           |
|             |   | Phase II (U.S.) |   |           |

 

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

 

*DRAXIMAGE**Ò**I-131 MIBG*

 

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

 

Regulatory Status - DRAXIMAGE is providing I-131 MIBG for two clinicaltrials approved by the FDA under an Investigational New Drug (“IND”)application.  One trial is a Phase IIstudy in which I-131 MIBG is being administered with intensive chemotherapy andautologous stem cell rescue for high-risk neuroblastoma patients.  The second trial is a Phase I study in whichirinotecan and vincristine, two common chemotherapy agents, are being administeredin combination with I-131 MIBG to determine safety and tolerability in patientswith resistant/relapsed high-risk neuroblastoma.

 

Both clinical trials are being coordinated by a group of elevenchildren’s hospitals and two universities in the United States known as the NewAdvances in Neuroblastoma Therapy (NANT) consortium.  These two trials are continuations of earlierNANT studies.  The clinical trialsstarted early in 2007 and are currently ongoing.  NANT member institutions are:

 

·                                          C.S. MottChildren’s Hospital, University of Michigan — Ann Arbor, MI

·                                          Children’sHealthcare of Atlanta — Atlanta, Georgia

·                                          Children’sHospital and Regional Medical Center — Seattle, WA

·                                          Children’sHospital Boston, Dana-Farber Cancer Institute — Boston, MA

·                                          Children’sHospital Los Angeles — Los Angeles, CA

·                                          Children’sHospital Medical Center — Cincinnati, OH

·                                          Children’sHospital of Philadelphia — Philadelphia, PA

·                                          Children’sMemorial Hospital — Chicago, IL

 

39

----

 

·                                          Lucile PackardChildren’s Hospital — Palo Alto, CA

·                                          Riley Hospitalfor Children, Indiana University — Indianapolis, IN

·                                          Texas Children’sCancer Center, Baylor College of Medicine — Houston, TX

·                                          University ofCalifornia, San Francisco — San Francisco, CA

·                                          University ofWisconsin Comprehensive Cancer Center — Madison, WI

 

Competing Therapeutic Products - We also believe that AZEDRAÔ, being developed by Molecular InsightPharmaceuticals, Inc. (“MIPI”) may compete with our DRAXIMAGEÒ I-131 MIBG product under clinicaldevelopment.  AZEDRAÔ has received Orphan Drug status and a FastTrack designation by the FDA.  Accordingto information set forth in its website, MIPI is conducting a Phase I dosimetrystudy with AZEDRAÔ in adults at DukeUniversity.  The initial target marketfor AZEDRAÔ dosimetry study is thetreatment of metastatic neuroendocrine tumours such as pheochromocytoma,carcinoid and neuroblastoma that are not amenable to treatment with surgery orconventional chemotherapy.  Metastatictumours are tumours that spread to other organs or parts of the body.  Additionally, according to information setforth in its website, MIPI initiated a Phase I/II study dose-finding andtherapeutic evaluation of the product in patients with malignantPheochromocytoma/Paraganglioma, which completion is expected for July 2012.The primary objectives of this study are to determine the maximum tolerateddose of the product and then, to determine the objective tumor response ratenine months following treatment.

 

#### ***Technetium Tc-99mGenerators***

 

DRAXIMAGE isdeveloping MOLY-FILLÔ, a “next-generation” version of aTechnetium Tc-99m Generator, which is the source of Technetium Tc-99m invirtually every radiopharmacy worldwide. According to the Bio-Tech Systems Report 270 (issued in November 2007),entitled “The U.S. Market for Diagnostic Radiopharmaceuticals”, the generatormarket in the United States is currently estimated at approximately $166.7million and is growing at approximately 5% annually.  Nearly 85% of generators are located inradiopharmacies and the rest are in other institutions such as hospitals andclinics.

 

Technetium (Tc99m) is one of the most widely used radiopharmaceuticals. Due to its shorthalf-life, it has to be produced on site or nearby by generators shipped with alonger half-life mother isotope, the molybdenum (Mo99).  In other words, generators are used toproduce technetium on site at the hospital or radiopharmacy. A generatorconsists of a column loaded with Mo99, encased within lead shielding designed toprovide protection from radiation.  Itcan typically provide Tc 99m for a period of approximately one week, dependingon the degree of usage by the radiopharmacy. During the fourth quarter of 2007, the Company completed a testevaluation of the prototype version of this product and the results of theevaluation will contribute to the continuing product development process.  DRAXIMAGE is in discussions with potentialdevelopment, marketing and manufacturing partners for its MOLY-FILLÔgenerator.

 

#### ***OtherDevelopment Products***

 

#### ***SOMATOSCAN***®/Somatostatin Therapy

 

Description - *SOMATOSCAN**®* and SomatostatinTherapy are radiolabelled somatostatin peptides derived from a syntheticpeptide based on MK-678, originally developed by Merck, which shows a highbinding affinity for the somatostatin receptors expressed in neuroendocrinetumors, lymphoma and carcinoid and small-cell lung cancer.  This peptide may be developed as both adiagnostic imaging agent (*SOMATOSCAN**®*) and therapeuticproduct (Somatostatin Therapy) and we believe that it may permit the 

 

40

----

 

identification and treatment of primary tumorsand the correct diagnosis of metastatic lesions. No substantial work related to*SOMATOSCAN**Ò* or SomatostatinTherapy has been carried out since 2005.

 

#### ***Paclitaxel***

 

Description - Paclitaxel is a novel, anti-tumor agent referred to insome scientific and medical literature as “taxol”.  Paclitaxel is currently marketed in the U.S.under the brand name TaxolÒ by Bristol-Myers SquibbCompany.  In January 1997, DRAXISacquired from Mylan Laboratories Inc. (“Mylan”) the exclusive Canadianmarketing rights to the Mylan formulation of paclitaxel.  In June 1998, DRAXIS filed with theHPFBI a New Drug Submission in Canada for paclitaxel, and the HPFBI hascompleted its review process.  Prior toapproval, DRAXIS must comply with Canadian Patented Medicines Regulations withrespect to generic competition.  Mylan iscurrently assessing the status of patent infringement litigation in Canadaregarding paclitaxel, and the Company has agreed to defer launch in Canadauntil such issues have been clarified.

 

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

 

### **Manufacturing**

 

#### ***RadioactiveProducts***

 

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

 

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

 

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

 

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

 

#### ***LyophilizedProducts***

 

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

 

41

----

 

*Regulatory*

 

In the period December 2001 through March 2002, DRAXIMAGE wasapproved by the FDA to transfer production of its line of lyophilized medicalimaging products in-house to the DRAXIS Pharma lyophilization productionfacility.

 

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

 

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

 

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

 

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

 

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

 

In January 2006, DRAXIMAGE announced it had received approval fromthe FDA for its supplemental new drug application for Sodium Iodide I-131Capsules USP, Diagnostic-Oral.  Thesediagnostic Sodium Iodide I-131 capsules are intended to be used by physiciansto perform the radioactive iodide (RAI) uptake test to evaluate thyroidfunction prior to treatment with stronger therapeutic doses of Sodium IodideI-131.  Diagnostic doses of Sodium IodideI-131 may also be employed in localizing metastases associated with thyroidmalignancies.  We introduced the newdiagnostic capsules in the U.S. market in May 2006.

 

In November 2006, DRAXIMAGE announced it had been approved by theFDA to run two clinical trials using radioactive Iobenguane I-131 Injection(also known as 131I-metaiodobenzylguanidine, or I-131 MIBG) to treat high-riskneuroblastoma, a rare form of cancer that affects mostly infants and youngchildren.  See “Products underDevelopment”.

 

DRAXIMAGE has a strong regulatory track record.  This includes 1 successful audit of ourfacilities in 2007 (1 regulatory inspection and 0 client audit) and 2successful audits of our facilities in 2006 (1 regulatory inspection and 1client audit).

 

### **Sales and Marketing**

 

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

 

#### ***UnitedStates***

 

DRAXIMAGE sells Tc-99m kits in the U.S. to several customers anddistributors including Cardinal Health 414, LLC, which operates the largestchain of radiopharmacies, Covidien (formerly Tyco Healthcare), GE Healthcare,United Pharmacy Partners Inc. and large university hospitals.

 

42

----

 

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

 

On February 2, 2007, DRAXIMAGE announced it had submitted an ANDA tothe FDA for its generic kit for the preparation of Tc-99m Sestamibi forinjection (“DRAXIMAGEÒ Sestamibi”), a nuclear medicine imagingagent used in myocardial perfusion imaging (“MPI”) to evaluate blood flow tothe heart in patients undergoing cardiac tests. On July 7, 2007, the Company was informed by the FDA that its ANDAsubmission was acceptable for filing.

 

According to BIO-TECH SYSTEMS, in 2007 there were 8.3 million nuclearcardiology procedures (out of 17.5 million total nuclear procedures) in theU.S.A.  Sales of nuclear cardiologyproducts were $1,291.6 million in 2007 (67.0% of total diagnostic radiopharmaceuticalsales).  Sales of Cardiolite, the largestsingle revenue producer, were $360.7 million (55% of cardiology perfusionsales) followed by MyoviewÔ with sales of $202.3 million(31% of cadiology perfusion sales).

 

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

 

Once its product is approved, DRAXIMAGE plans to enter the MPI marketafter the key patent for the currently marketed Tc-99m Sestamibi productexpires, which is expected to be in 2008 for the United States, 2009 for Canadaand from 2007 onwards in various European countries, and after it receivesregulatory approval for the sale of DRAXIMAGEÒ Sestamibi.

 

See “Risk Factors — Risks Related to our Industry — If the Market DoesNot Accept our Products Currently in Development, our Business Could BeHarmed”.

 

#### ***Canada***

 

From January 1, 2003 to December 31, 2007, DRAXIMAGE marketed,in Canada, most of its products directly to end-users through a co-operativeagreement with Bristol-Myers Canada, pursuant to which Bristol-Myers Canada’ssales force promoted the non-competitive product lines of each party.  This distribution agreement terminated on December 31,2007 and has not been renewed.  As of January 1,2008, DRAXIMAGE is marketing its products in Canada directly to hospitals andradiopharmacies and through non-exclusive distributors.

 

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

 

TheCompany also filed an Abbreviated New Drug Submission (“A/NDS”) for DRAXIMAGEÒ Sestamibi on August 17, 2007 withHealth Canada.  On October 11, 2007,the Company was informed by Health Canada that this submission had beenscreened and found acceptable for review.

 

43

----

 

#### ***Europe***

 

The radiopharmaceutical market in Europe is characterized by strongregional fragmentation, which gives the leading market share to the individualmanufacturer located in each of the major countries (e.g. GE Amersham Health inthe UK, Covidien (formerly Tyco Healthcare) in Holland and CIS Bio inFrance).  DRAXIMAGE’s marketingactivities in Europe are at their earliest stages pending regulatory approvalsin this jurisdiction.  As of December 31, 2007, DRAXIMAGE had six regulatory submissionsfiled with European regulatory authorities: four with the Medicines EvaluationBoard in the Netherlands, one with the Danish Medicines Agency, and one inDenmark under the decentralized procedure. The submission dates for the radiopharmaceutical products filed in theNetherlands and with the Danish Medicine Agency range from June 2003 to December 2004.The regulatory submission for our product in Denmark was filed in 2007. All ofthe approvals, except for the most recent submission, sought by DRAXIMAGE inEurope are for marketing authorizations through the mutual recognitionprocedure, which involves obtaining approval in one state (the “referencemember state”) and recognition of that approval in other member states.  Five of the approvals being sought byDRAXIMAGE in Europe are for radiopharmaceutical products already approved inCanada or the U.S. The most recent submission is for DRAXIMAGEÒ Sestamibi which has not yet received approval in Canada or the U.S. Twoof these six European submissions, made for DRAXIMAGE MAA kit and MDP kit,received approval in a reference member state, the Netherlands, in February 2005and March 2006.  The MDP kit alsoreceived approval in the United Kingdom in February 2008.  The MAA kit has also been approved inGermany, the United Kingdom, Austria and Luxembourg.  A third approval for DRAXIMAGE’s SodiumIodode I-131 capsules was granted in reference member state, Denmark, in September 2007.

 

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

 

On July 25,2007, DRAXIMAGE announced it had filed DRAXIMAGEÒ Sestamibi with European regulatoryauthorities.

 

### **Research and Development**

 

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

 

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

 

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

 

44

----

 

On August 22, 2007 DRAXIMAGE announcedthat it had established a research collaboration agreement with Med DiscoverySA of Switzerland to explore the combination of Med Discovery’s targetedprotein therapeutics with DRAXIMAGE’s radiopharmaceutical expertise in thetherapeutic and diagnostics field.

 

Med Discovery’s lead proteins are themselvespotential therapeutic agents for prostate cancer and a variety of othercancers.  This collaboration providesinitially for the radiolabelling of certain Med Discovery’s proteins byDRAXIMAGE to assess the enhancement of their therapeutic action and theircapability to detect micro tumors.  Theproteins will be produced at Med Discovery’s facility in Switzerland andradiolabelled by DRAXIMAGE in Canada.

 

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

 

### **Employees**

 

As at December 31, 2007, DRAXIMAGE had 94****employees(representing approximately 20% of the Company’s employees), consisting of 9general management and administration employees, 9 marketing, selling andcustomer service employees, 24 quality operations employees, 39 manufacturingemployees, and 13 research and development employees.  None of these employees is unionized.

 

### **Patents**

 

Most of DRAXIMAGE’s development products as well as currently soldproducts such as SMART-FILLÔ are covered by patents held(or for which patents have been applied) by DRAXIMAGE or licensed from thirdparties.  DRAXIMAGE has numerous patentsissued and allowed and patent applications pending in the United States,Canada, Europe and Japan.  For example,DRAXIMAGE has various U.S. issued patents related to chelates forradiopharmaceutical applications and process patents for the preparation ofcertain radiopharmaceuticals.  Thepatents held by DRAXIMAGE have expiry dates ranging from November 2008 to December 2020.  See “Risk Factors — Risks Related to ourIndustry — We May not be Able to Obtain and Enforce Effective Patents toProtect our Proprietary Rights From Use by Competitors, and the Patents ofOther Parties Could Require Us to Stop Using or to Acquire a License forConducting Certain Business Activities, and our Competitive Position andProfitability Could Suffer as a Result.”

 

DRAXIMAGE also relies on trade secrets, know-how and other proprietaryinformation to protect its current products and technologies.  To protect DRAXIMAGE’s rights in these areas,it requires all licensors, licensees, customers and significant employees toenter into confidentiality agreements. There can be no assurance, however, that these agreements will providemeaningful protection to DRAXIMAGE’s patents, trade secrets, know-how or otherproprietary information in the event of any unauthorized use or disclosure ofsuch patents, trade secrets, know-how or other proprietary information.  See “Risk Factors — Risks Related to ourCompany — If our Collaborative and Commercial Relationships with Third Partieson Whom we Rely are Unsuccessful, our Business May Suffer.”

 

**OtherCollaboration Agreements**

 

We have continuing financial interests associated with our collaborationagreements with Pfizer with respect to *ANIPRYL**®* and with Shirewith regard to Canadian sales of products divested in 2003.  As of January 31, 2005 all deferredrevenue related to the SpectroPharmÒ line of products from GSK wasfully amortized by the Company.

 

45

----

 

*ANIPRYL**®*

 

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

 

*ANIPRYL**®* is a selegiline product developed for use inveterinary prescriptive applications, particularly in dogs.  The two indications for which *ANIPRYL**®* is currently approved are canine Cushing’s diseaseand canine cognitive dysfunction syndrome (“CDS”).

 

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

 

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

 

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

 

In December 1997, we entered into an alliance with Pfizer wherebyPfizer was granted a perpetual exclusive license to market, sell and distribute*ANIPRYL*® in exchange fornon-refundable fees, royalties based on the worldwide sales of *ANIPRYL*®, a manufacturing and supply agreement and aresearch collaboration.

 

In December 1999, the Company and Pfizer amended the terms of thealliance (the “First Amendment”) whereby $9.0 million of potential additionalnon-refundable fees were eliminated in exchange for the Company receivingadditional regulatory support for a potential new indication and additionalmanufacturing data.  These potentialadditional non-refundable fees would have become payable if Pfizer hadexercised its rights to acquire product registrations following regulatoryapproval of *ANIPRYL*® in designated European countries.

 

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

 

In December 2001, the Company and Pfizer further amended the termof the alliance (the “Second Amendment”) whereby the Company received a paymentof $3.1 million with respect to minimum royalty entitlements for the second andthird three-year periods ended December 31, 2001 and 2002 andmodifications to future royalty entitlements. The Second Amendment also resulted in all rights to *ANIPRYL*® outside of North Americareverting back to the Company, forfeiture of any additional minimum royaltyentitlements and the termination of any future collaborative research on newindications or formulations for *ANIPRYL*®.

 

46

----

 

Cumulatively to December 31, 2007, we received a total of $28.1****million in non-refundable fees and $18.3****million in royalties and royalty-related payments relatingto *ANIPRYL*Ò.

 

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

 

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

 

*ANIPRYL*® is currently approved forsale in Canada, the United States, Australia, United Kingdom, New Zealand andBrazil.  However, *ANIPRYL*® is not currently sold inAustralia, New Zealand, the United Kingdom or Brazil.

 

In 1997, DAHI filed for regulatory approval of *ANIPRYL*® in Europe by using thedecentralized procedure.  This procedureallows DAHI to file the *ANIPRYL*® submission in a country ofits choice, and to designate five additional member states of the EuropeanUnion as the countries that will review and approve the regulatorysubmissions.  DAHI chose the UnitedKingdom as the country in which to file the initial *ANIPRYL*® applications.  In July 2003, DAHI receivedauthorization from the Veterinary Medicines Directorale (“VMD”) to market *ANIPRYL*® tablets for dogs in the United Kingdom.  The United Kingdom submission has beenreformatted in order to be suitable for submission to other European Unionmember states.  The VMD has acted asDAHI’s advocate in this procedure.

 

### **Sales and Marketing**

 

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

 

In July 2003 DRAXIS granted Ceva Santé Animale S.A. (“CEVA”) anexclusive license for the marketing and distribution of *ANIPRYL*®in Europe.  On March 25, 2008, CEVAand DRAXIS mutually terminated the licence agreement between them effective December 31,2007.  The Company will not seek tocontinue to have *ANIPRYL*® approved in Europe.

 

### **Manufacturing**

 

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

 

Under its supply agreement with Pfizer, DAHI is entitled to designate athird-party supplier or to manufacture *ANIPRYL*® itself in a qualifiedfacility.

 

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

 

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

 

47

----

 

### **Competition**

 

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

 

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

 

No significant competition for *ANIPRYL*® has been experienced to datein Canada or the United States from products approved for veterinary or humanuse.  However, there are two othertreatments available that have not been approved in Canada or the United Statesto treat canine Cushing’s disease, that we believe may be being used off-labelfor canine Cushing’s disease:  *LYSODREN**®* (mitotane) byBristol-Myers Squibb Co., which was approved for use in the treatment of humaninoperable cancer of the adrenal gland and *NIZORAL**®* (ketoconazote)tablets by Johnson & Johnson, Inc., an anti-fungal medication,which was approved for the treatment of various internal and external fungaland yeast infection in humans.  Thesecompetitive treatments work by selectively killing the outer layer of theadrenal gland, thereby limiting production of corticosteroid.  The human generic version of *ELDEPRYL*® is not approved for the treatment of canineCushing’s disease or CDS in Canada, the United States or elsewhere.  However, we believe that such use of humanselegiline may compete with the use of *ANIPRYL*® in dogs.  The dosage required for dogs suffering fromcanine Cushing’s disease and CDS, in most cases, is much higher than the human5mg dose for selegiline.

 

Patents for the use of *ANIPRYL*® for the treatment of dogswith conditions including canine Cushing’s disease and CDS are issued inCanada, the United States and other jurisdictions.  We believe DAHI is positioned to enforce itsproprietary patent rights and defend itself against infringement by other parties.

 

48

----

 

### **Patents**

 

In September 1992, the United States Patent andTrademark Office issued a patent to DAHI entitled “Use of l-deprenyl forRetention of Specific Physiological Function”. The patent claims specific uses of l-deprenyl for use in treating dogsand covers currently sold products. Similar patents have also issued to DAHI in many foreignjurisdictions, including Canada, New Zealand, Venezuela and Europe.  Six additional U.S. patents have also issuedto DAHI.  These patents cover various veterinary pharmaceutical uses ofl-deprenyl such as treatment of Cushing’s Disease, weight loss, treatment ofimmune system dysfunction, extension of life expectancy of dogs, and treatmentof hearing loss.  Four of these sixpatents were also filed in foreign countries that have major companion animalmarkets.  The markets for the cognitivedisease patents are Canada, U.S., Europe, Japan, Mexico, Venezuela, New Zealandand Malaysia.  The markets for theCushing’s Disease patent are Europe, Canada and the U.S.  The markets for the survival cure shiftingpatent are Canada, Norway, Finland and Europe. The markets for the treatment of hearing loss patent are Japan andCanada.  The patents held by DAHI haveexpiry dates ranging from August 31, 2010 to June 3, 2016.

 

The European CDS patent was subject to an opposition procedure initiatedby CEVA.  CEVA holds patents in theUnited States, Canada and Europe relating to the use of selegiline for treatingbehavioral disorders with change of mood in dogs and cats.  CEVA’s European patent was subject to anopposition procedure by DAHI.  In July 2003,DRAXIS and CEVA agreed to discontinue the opposition proceedings between thembefore the EPO.  DRAXIS also granted CEVAan exclusive license for the marketing and distribution of *ANIPRYL*® or the use of *ANIPRYL*® claims in Europe.  In return, CEVA agreed to pay DAHI apercentage royalty on European sales of *ANIPRYL*® and/or the use of *ANIPRYL*® claims, in addition to nominal milestonepayments upon the regulatory approval of *ANIPRYL*® in the UK and in subsequentadditional jurisdictions within the European Community.  The agreement also gave DAHI the rights touse Chinoin selegiline in any jurisdiction. On March 25, 2008, CEVA and DRAXIS mutually terminated the licenceagreement between them effective December 31, 2007.  The Company will not seek to continue to have*ANIPRYL*® approved in Europe.

 

*SpectroPharm® Product Line*

 

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

 

## **DiscontinuedOperations (DRAXIS Pharmaceutica)**

 

In July 2003, we completed the divestitureof our Canadian pharmaceutical sales and marketing division, DRAXISPharmaceutica, with the sale to Shire of substantially all remaining productsof the division, including the Canadian product rights for Alertec®, Diastat®, Hectorol®, Permax®and Zanaflex®.  Shireagreed to pay DRAXIS through a combination of cash and contingent milestonepayments plus royalties on future product sales.  In addition, Shire assumed responsibility forthe financial provisions of the license agreement related to Permax®.

 

49

----

 

**Government Regulation**

 

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

 

**DRUGS**

 

### **Drug Approval Process**

 

#### ***HumanPharmaceuticals***

 

In Canada, pharmaceutical research, development and marketing activitiesare regulated by the Food and Drugs Act (Canada) and the rules, regulations,policies and guidelines made thereunder. Insofar as it relates to drugs for human use, the Food and Drugs Act(Canada) is administered by the Therapeutic Products Directorate of the HealthProducts and Food Branch (“TPD”), which regulates the use and sale ofdiagnostic and therapeutic products in Canada. In the United States, these activities are regulated under lawsadministered by the Food and Drug Administration (“FDA”), which also have asignificant impact on the Company’s activities.

 

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

 

Before commencing clinical trials in Canada or the United States, aClinical Trial Application (“CTA”) must be submitted with the TPD (in the UnitedStates an Investigational New Drug (“IND”) application must be submitted withthe FDA).  The CTA or IND applicationincludes manufacturing data, pre-clinical data, information about use of thedrug in humans for other purposes and a detailed protocol for the conduct ofclinical trials.

 

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

 

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

 

50

----

 

timely manner. In certain limited circumstances, the TPD will permit a New DrugSubmission to be subject to a priority review. The TPD’s Priority Review Process allows for a faster review to makeavailable promising drug products for a serious, life-threatening or severelydebilitating illness or condition for which there is substantial evidence ofclinical effectiveness that the drug provides: (i) effective treatment,prevention or diagnosis of a disease or condition for which no drug ispresently marketed in Canada; or (ii) a significant increase in efficacyand/or significant decrease in risk such that the overall benefit/risk profileis improved over existing therapies, preventatives or diagnostic agents for adisease or condition that is not adequately managed by a drug marketed inCanada.

 

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

 

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

 

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

 

#### ***VeterinaryPharmaceuticals***

 

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

 

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

 

### **Drug Marketing**

 

#### ***HumanPharmaceuticals***

 

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

 

51

----

 

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

 

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

 

#### ***VeterinaryPharmaceuticals***

 

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

 

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

 

### **Patent Protection and Price Controls**

 

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

 

52

----

 

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

 

Under United States patent law, a patent is issued to the person whomade the invention first, rather than to the first person to file anapplication therefor, as is common in other countries, such as Canada.  Consequently, in determining who is entitled toa United States patent for a particular technology, itis important to consider that it is possible for an inventor to establish anentitlement based on a prior invention, notwithstanding an earlier filed patentapplication.  Prior invention may not beestablished before December 8, 1993, in a NAFTA country other than theUnited States, or before January 1, 1996, in a WTO member country otherthan a NAFTA country.

 

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

 

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

 

### **Drug Manufacturing**

 

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

 

Pharmaceutical manufacturing facilities are subject to strict qualitycontrol standards including current good manufacturing practices(“cGMPs”).  Production processes within afacility are subject to one-time validation testing, as well as periodicreview.  In the case of sterile productmanufacturing, including lyophilized products, the standards are even higherthan for the manufacturing of non sterile products.  The manufacture of radioactive drugs issubject not only to cGMPs but also the environmental safety, handling andtransportation requirements of the Canadian Nuclear Safety Commission (“CNSC”) 

 

53

----

 

and the United States Nuclear RegulatoryCommission (“NRC”).  There are no issueswith respect to radioactive waste disposal since all of the isotopes used innuclear medicine are short-lived and can be easily stored on site until decayedand then disposed of.

 

The FDA, the Health Products and Food Branch of Health Canada (“HPFBI”),CNSC and NRC conduct regular audits of the Company’s facilities to ensurecompliance with cGMPs and other statutory requirements.  See “Risk Factors — Risks related to ourindustry”.

 

**ENVIRONMENTALLAWS**

 

Canadianand U.S. federal, state, local and provincial regulations govern extensivelythe use, manufacture, storage, handling, transport and disposal of hazardousmaterials and associated waste products. The Company is not aware of any material environmental issues that affectthe Company’s utilization of its assets. As of December 31, 2007, the Company has not received any noticestating that it is not in compliance with environmental legislation applicableto it.

 

54

----

 

**ORGANIZATIONALSTRUCTURE**

 

The following chart illustrates the corporate organizational structureand governing jurisdictions of the Company and its significant affiliates as atMarch 31, 2008.

 

All ofthe below-depicted companies are wholly owned subsidiaries of DRAXIS.

 

----

(1)DRAXISSpecialty Pharmaceuticals Inc. has two divisions, DRAXIMAGE(radiopharmaceuticals) and DRAXIS Pharma (contract manufacturing).

 

 

**PROPERTY,PLANTS AND EQUIPMENT**

 

Our sole operating facility is a 247,000-square-foot pharmaceuticalmanufacturing facility which houses the DRAXIMAGE and DRAXIS Pharmaoperations.  The facility is owned byDRAXIS Specialty Pharmaceuticals Inc., a wholly-owned subsidiary of the Companyand is located at 16751 Trans-Canada Road, Kirkland, Québec, Canada, H9H4J4.  See “Risk Factors — Risks Relatedto our Company — We only have one manufacturing facility and factors beyond ourcontrol could cause an interruption in our manufacturing operations, whichcould adversely affect our reputation in the market place and our results ofoperations.”

 

55

----

 

On November 27, 2007, the Company announced that it had initiatedconstruction of a 77,000 square foot new secondary packaging and warehousingfacility in the Montréal area to aid DRAXIS in fulfilling its obligation underits recently announced contract to produce a broad portfolio of multiplenon-sterile specialty semi-solid products for JJC.  The new facility is expected to be completedby mid-2008, after which equipment will be installed and validated to ensurecompliance with applicable regulatory requirements.

 

The new facility has been custom designed by and is being built byMontréal based developer Broccolini Construction Inc., specifically to meet theneeds of DRAXIS with respect to this major new contract but will be owned bythe Broccolini Group of Companies and leased to DRAXIS under a seven yearagreement with options to renew.  Thefacility will be situated in the Montréal area in the community ofSte-Anne-de-Bellevue close to major highway access and within ten kilometers(six miles) of the main DRAXIS production facility in Kirkland, just outsideMontréal.

 

As of December 31, 2007, we have no third-party debt outstandingother than as provided for in Note 16 of the Consolidated Financial Statements.

 

**Item 4A  Unresolved Staff Comments**

 

There are no unresolved written comments that were received from theSecurities and Exchange Commission’s staff 180 days or more before the end ofthe Company’s fiscal year to which this Annual Report relates.

 

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

 

The following management’s discussion and analysis (“MD&A”) of thefinancial condition and results of operations of DRAXIS Health Inc. (“DRAXIS”or the “Company”) is based on the Company’s audited consolidated financialstatements and notes thereto for the year ended December 31, 2007 andshould be read in conjunction therewith.

 

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

 

Readers are cautioned not to place undue reliance on forward-lookingstatements contained in this MD&A since actual results could differ materiallyfrom what we expect if known or unknown risks affect our business or if anestimate or assumption turns out to be inaccurate.  Unless otherwise required by applicablesecurities laws, the Company disclaims any intention or obligation to update orrevise any forward-looking statements, whether as a result of new information,future events or otherwise (see Forward-Looking Statements on page 79hereof).

 

This MD&A is dated February 29, 2008.

 

**Overview**

 

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

 

56

----

 

**Termination of Amortization ofAnipryl® Deferred Revenues**

 

Asindicated in prior disclosures, substantially all revenues related to theamortization of previously received *Anipryl®*milestones terminated on December 31, 2006. The amortization of thesedeferred revenues has previously resulted in non-cash revenues of $0.8 millionper quarter, contributing approximately 7 cents of earnings per share (“EPS”)per full year. The termination of this source of non-cash revenue and operatingincome has no effect on cash flows but affects year-over-year comparisons ofoperating results beginning with the first quarter of 2007 (see “Corporate andOther”).

 

**Consolidated Results of Operations**

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

 
| ** **                        | ** ** | **2007**    | ** ** | **2006**   |   | **2005**   |   |
|-----------------------------------|------------|-------------|------------|------------|--------|------------|--------|
| **Revenues**                      | ** ** | ** **  | ** ** | ** ** |   | ** ** |   |
| Product sales                     | ** ** | **$**       | **76,072** | ** ** | $      | 83,545     |   | $ | 72,989 |   |
| Royalty and licensing             | ** ** | **2,668**   | ** ** | 2,121      |   | 3,143      |   |
| *Anipryl*® deferred revenues | ** ** | **120**     | ** ** | 3,301      |   | 3,301      |   |
|                              | ** ** | **$**       | **78,860** | ** ** | $      | 88,967     |   | $ | 79,433 |   |
|                              | ** ** | ** **  | ** ** |       |   |       |   |
| Product gross  margin             | ** ** | **$**       | **26,454** | ** ** | $      | 36,462     |   | $ | 26,153 |   |
| *% of Product sales revenues*     | ** ** | ***34.8***  | ***%***    | *43.6*     | *%*    | *35.8*     | *%*    |
| Royalty and  licensing revenue    | ** ** | **2,788**   | ** ** | 5,422      |   | 6,444      |   |
| SG&A                          | ** ** | **(18,807** | **)**      | (19,425    | )      | (16,185    | )      |
| *% of Product sales revenues*     | ** ** | ***-24.7*** | ***%***    | *-23.3*    | *%*    | *-22.2*    | *%*    |
| R&D                           | ** ** | **(2,446**  | **)**      | (2,372     | )      | (2,103     | )      |
| Depreciation and  amortization    | ** ** | **(5,841**  | **)**      | (5,135     | )      | (4,545     | )      |
| Operating income                  | ** ** | **2,148**   | ** ** | 14,952     |   | 9,764      |   |
| *% of Total revenues*             | ** ** | ***2.7***   | ***%***    | *16.8*     | *%*    | *12.3*     | *%*    |
| **Financial**                     | ** ** | ** **  | ** ** |       |   |       |   |
| - Foreign  exchange (loss) gain   | ** ** | **(1,716**  | **)**      | 282        |   | (398       | )      |
| - Other                           | ** ** | **870**     | ** ** | 347        |   | (29        | )      |
| Income tax  (recovery) expense    | ** ** | **(356**    | **)**      | 4,034      |   | 1,553      |   |
| **Net  income**                   | ** ** | **$**       | **1,658**  | ** ** | $      | 11,547     |   | $ | 7,784 |   |
|                              | ** ** | ** **  | ** ** |       |   |       |   |
| Basic earnings  per share         | ** ** | **$**       | **0.04**   | ** ** | $      | 0.28       |   | $ | 0.19 |   |
|                              | ** ** | ** **  | ** ** |       |   |       |   |
| Diluted earnings  per share       | ** ** | **$**       | **0.04**   | ** ** | $      | 0.28       |   | $ | 0.18 |   |

 

*The following provides a high-level overview of theconsolidated results of the Company. Please see “Segment Reporting” for more detailed explanations.*

 

**Comparison of Years Ended December 31,2007 and 2006**

 

Consolidatedrevenues for the year ended December 31, 2007 decreased 11% compared tothe year ended December 31, 2006 due to lower volumes in contractmanufacturing and the loss of the non-cash *Anipryl*®deferred revenue amortization. These factors were partially offset by one-timecontingent milestone payments from Shire BioChem Inc. (“Shire”) which wereearned in the first quarter of 2007.

 

57

----

 

Consolidatedproduct sales decreased 9% to $76.1 million for 2007 compared with the sameperiod in 2006.  Contract manufacturingproduct sales decreased 15% in 2007 compared to the same period of 2006. Thedecrease was related to lower sterile volumes mainly due to lower demand for *Hectorol®* and lower sterilevolumes under the GSK contract relative to 2006. Radiopharmaceutical productsales increased 8% over the same period of 2006. The increase was due to theinclusion of a chargeback for freight services beginning on April 1,2007.  In addition, the Company suspendedproduction of a private label radioactive product for one customer thathistorically contributed $350,000 in quarterly product sales.

 

Duringthe course of 2007, two separate shortages for the supply of radioactiveisotopes occurred which impacted the financial performance of theradiopharmaceutical segment. The first shortage resulted in the Companyobtaining the approval of a secondary source of supply for the U.S. market. Thesecond shortage created an industry-wide decrease in demand in late 2007 forradioactive procedures due to a short supply in the marketplace ofradioisotopes, being the key ingredient.

 

Productgross margin percentages for 2007 decreased to 35% as compared with 44% for thesame period in 2006. The decline is attributable to reduced margins in thecontract manufacturing segment resulting from lower sterile volumes,principally volumes of *Hectorol*®.

 

Theincrease in royalty and licensing revenue for the year ended December 31,2007 compared to 2006 reflects the receipt of $0.8 million of contingentmilestone payments from Shire in the first quarter of 2007.

 

As apercentage of product sales, selling, general and administrative (“SG&A”)expenses were 25% for 2007 compared to 23% for 2006.  SG&A expenses decreased for 2007 comparedto 2006 due to an overall decrease in incentive plan accruals which more thanoffset total severance costs of $2.3 million during 2007.

 

OverallR&D expenditures were similar for 2007 compared to 2006.  R&D resources in 2007 were largelyfocused on the DRAXIMAGE® Sestamibi and MOLY-FILLTM TechnetiumGenerator projects.

 

Depreciationand amortization expense for all of 2007 increased compared to 2006 due to thecompletion of the Company’s IT and SAP upgrade activities in 2007, includingthe implementation of a new warehouse management system.

 

Themajority of the Company’s operating costs are denominated in Canadian dollars.As the level of revenues denominated in U.S. dollars and other foreign currenciesincreases relative to the underlying cost structure, the Company’s overallgross profit margins and SG&A expenses are negatively affected duringperiods where the Canadian dollar appreciates in value.

 

Foreignexchange had a significant impact in 2007 compared with 2006 due to thecontinued rapid strengthening of the Canadian dollar beginning in April 2007,which resulted in a foreign exchange loss of $1.7 million for 2007. The Companyis subject to a foreign exchange loss as a result of the negative impact of thestrengthening of the Canadian dollar on U.S. dollar-denominated monetary assetsheld by the Company. The Company expects to partially mitigate its currencyrelated risk over the next 12 to 15 months by an increase in its U.S.dollar-denominated customer financing related to activities expected to becarried out in connection with the new non-sterile manufacturing contract withJJC.

 

Theeffective tax rate is lower than the statutory rate due primarily to the amountof R&D tax credits earned in the year. The Company’s effective tax ratewill vary from the statutory tax rate 

 

58

----

 

depending on the mix of net income combined with thestatutory rates in the respective jurisdictions in which the Company operates.

 

Thebasic weighted-average number of common shares outstanding during 2007 was41,955,989 and has increased from 41,592,507 in 2006, primarily as the resultof the exercise of stock options, offset by shares purchased for cancellationunder the Company’s Normal Course Issuer Bid initiated in December 2006.  As at the date hereof, the Company has42,062,538 common shares outstanding and also has outstanding 2,135,828 optionsto acquire common shares.

 

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

 

Thefinancial results for the year ended December 31, 2005 were negativelyaffected by the extended shutdown period that occurred in the sterile productsarea of the Company’s contract manufacturing business.  Accordingly, all comparative variances on aconsolidated basis and in the contract manufacturing section reflect the impactof the extended shutdown in 2005.

 

Consolidatedrevenues for the year ended December 31, 2006 are 12% higher compared to2005.

 

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

 

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

 

Consolidatedproduct gross margin percentages for the year ended December 31, 2006increased to 44% as compared with 36% for 2005. The increase reflects a bettermix of higher margin business in both operating segments, especially sterileproduct volume in contract manufacturing.

 

Royaltyand licensing revenue decreased for the year ended December 31, 2006compared with 2005. The decrease in royalty and licensing revenue for the yearended December 31, 2006 compared to 2005 reflects the receipt of a $0.9million contingent milestone payment from Shire in 2005.

 

As apercentage of product sales, SG&A expenses were 23% for the year ended December 31,2006 compared to 22% for 2005. The 20% increase in SG&A expenses inabsolute dollar terms (excluding the impact of foreign currency translation) forthe year ended December 31, 2006 as compared with 2005 was driven by theinclusion of non-cash stock-based compensation costs beginning January 1,2006, coupled with increased incentive plan accruals based on the Company’sfinancial performance for 2006 relative to 2005.  The impact of the strengthening of theCanadian dollar for much of 2006 relative to 2005 increased the nominal valueof SG&A expenses.

 

R&Dexpenditures increased slightly for the year ended December 31, 2006compared to 2005 due to the work related to specific phases of the Company’sdevelopment activities related to DRAXIMAGE® Sestamibi and theMOLY-FILLÔ Technetium Generators as theCompany completed stages of activities with respect to both initiatives late in2006. These products are described in the “Radiopharmaceuticals” section.

 

Depreciationand amortization expense for the year ended December 31, 2006 increased by13% over 2005 following the commencement of depreciation charges on theCompany’s contract manufacturing capital upgrades.

 

59

----

 

Themajority of the costs of the Canadian operations are denominated in Canadiandollars. As the level of revenues denominated in U.S. dollars and other foreigncurrencies increases relative to the underlying cost structure, the Company’soverall gross profit margins and SG&A expenses are affected. The impact isnot material on the overall financial performance for the year.

 

The netforeign exchange gain for the year ended December 31, 2006 was $282,000compared to a loss of $398,000 for 2005. As a result of the impact of theweakening of the Canadian dollar late in 2006, a foreign exchange gain wasearned on U.S. dollar-denominated monetary items in 2006, whereas thestrengthening of the Canadian dollar late in 2005 created a foreign exchangeloss.

 

Netfinancial income for 2006 was $347,000 compared to an expense of $29,000 in2005 due to significant interest income generated from surplus cash.

 

For theyear ended December 31, 2006, the Company recorded an income tax expense,expressed as a percentage of pre-tax earnings of 26%.  The Company’s effective tax rate will varyfrom the statutory tax rate depending on the mix of income combined with thestatutory rates in the respective jurisdictions in which the Company operates.The level of tax credits generated from R&D activities in theradiopharmaceutical business also has the impact of lowering effective taxrates.

 

Theeffective tax rate for 2006 was higher than in 2005 due to a one-timeadjustment to revalue the Company’s income tax assets to a lower rate followingthe enactment of a statutory rate change to Canadian federal taxes in thesecond quarter of 2006.

 

Thebasic weighted-average number of common shares outstanding during 2006 was41,592,507 and increased from 41,471,798 for 2005, primarily as a result of theexercise of stock options offset by the shares purchased for cancellation underthe Company’s Normal Course Issuer Bid.

 

**Radiopharmaceuticals***(inthousands of U.S. dollars) (U.S. GAAP)*

 
| ** **                    | ** ** | **2007**   | ** ** | **2006**   |   | **2005**   |   |
|-------------------------------|------------|------------|------------|------------|--------|------------|--------|
| **Revenues**                  | ** ** | ** ** | ** ** | ** ** |   | ** ** |   |
| Product sales                 | ** ** | **$**      | **23,216** | ** ** | $      | 21,508     |   | $ | 19,290 |   |
| Royalty and licensing         | ** ** | **—** | ** ** | (3         | )      | 9          |   |
|                          | ** ** | **$**      | **23,216** | ** ** | $      | 21,505     |   | $ | 19,299 |   |
|                          | ** ** | ** ** | ** ** |       |   |       |   |
| Product gross margin          | ** ** | **$**      | **12,976** | ** ** | $      | 13,433     |   | $ | 11,593 |   |
| *% of Product sales revenues* | ** ** | ***55.9*** | ***%***    | *62.5*     | *%*    | *60.1*     | *%*    |
| SG&A                      | ** ** | **(5,382** | **)**      | (4,380     | )      | (4,660     | )      |
| R&D                       | ** ** | **(2,446** | **)**      | (2,372     | )      | (2,103     | )      |
| Depreciation and amortization | ** ** | **(1,096** | **)**      | (1,110     | )      | (1,047     | )      |
| Operating income              |       | **$**      | **4,052**  |       | $      | 5,568      |   | $ | 3,792 |   |
| *% of Revenues*               | ** ** | ***17.5*** | ***%***    | *25.9*     | *%*    | *19.6*     | *%*    |

 

Nuclearmedicine imaging and therapeutic agents are the focus of the Company’sradiopharmaceutical division, DRAXIMAGE, which develops, manufactures andmarkets diagnostic imaging and therapeutic radiopharmaceutical products for theglobal marketplace. Products currently marketed by DRAXIMAGE include a line oflyophilized Technetium-99m kits used in nuclear medicine imaging procedures anda line of imaging and therapeutic products labelled with a variety of isotopes 

 

60

----

 

including Sodium Iodide I-131. DRAXIMAGE has a numberof products in late-stage development including a generic Sestamibi injection,a lyophilized product that is widely used for Technetium-based cardiac imagingstudies and MOLY-FILLTM, a “next-generation” version of a Technetium Generator.

 

**Comparison of YearsEnded December 31, 2007 and 2006**

 

Revenuesfor 2007 increased 8% compared to 2006 driven by the inclusion of freightcharges in revenues effective April 1, 2007.

 

Productrevenues decreased excluding the inclusion of freight charges compared to 2006.The decrease is due to the Company temporarily suspending production early inthe third quarter of 2007 of a private label radioactive product for onecustomer. This product contributed historically $350,000 to quarterly revenues.It is the Company’s belief that the customer will either permanently withdrawthis product from the marketplace or make formulation changes and theirdecision is expected in the first half of 2008.

 

Theradiopharmaceutical segment’s revenues were also impacted by lower demandrelated to an industry shortage of radioactive medical isotopes in the fourthquarter of 2007. This was related to an extended shutdown at one of the largestglobal suppliers of radioactive isotopes late in 2007. While the Company has analternative approved source of supply for its raw materials, the shutdownaffects the ability of radiopharmacies to carry out procedures resulting inlower demand. The Company was also impacted by a similar shutdown in the secondquarter of 2007, which resulted in the Company seeking and obtaining regulatoryapproval for an alternative source of supply.

 

In2007, the Company began installing its new capsule-filler technology (“DRAXIMAGESMART-FILLTM”) at customer radiopharmacies. The Company’s introduction of itsDRAXIMAGE SMART-FILLTM capsule-filler technology is expected to drive furthergrowth into 2008. Installation of these units will continue into 2008.

 

Productgross margin for 2007 decreased to 56% compared to 63% for 2006 due toinclusion of freight charges in both revenues and cost of goods sold beginningon April 1, 2007 and foreign exchange pressures related to the dramaticstrengthening of the Canadian dollar over 2006.

 

SG&Aexpenses increased $1.0 million for 2007 relative to the same periods of 2006due to an increased investment in business development activities coupled withregulatory filing fees for Europe and Canada.

 

OverallR&D expenditures were similar for 2007 compared to 2006.  R&D resources in 2007 were largelyfocused on the DRAXIMAGE® Sestamibi and MOLY-FILLÔ Technetium Generator projects.

 

Operatingincome was $1.5 million lower for all of 2007 compared to the same period of2006 due to decreased sales volumes as described above, pressures on marginfrom a stronger Canadian dollar, regulatory filing fees and increased businessdevelopment activities.

 

Depreciationand amortization expense for this segment was relatively unchanged for 2007compared to the same period of 2006.

 

61

----

 

**RadiopharmaceuticalProduct Development Strategy**

*DRAXIMAGE®Sestamibi*

* *

Asannounced on February 2, 2007, DRAXIMAGE submitted an Abbreviated New DrugApproval (“ANDA”) to the U.S. Food and Drug Administration (“FDA”) for itsgeneric kit for the preparation of Tc-99m Sestamibi for injection, DRAXIMAGE®Sestamibi, a nuclear medicine imaging agent used in myocardial perfusionimaging (“MPI”) to evaluate blood flow to the heart in patients undergoingcardiac tests. Furthermore, the FDA acknowledged in July 2007 the receiptand acceptance for review of the ANDA for DRAXIMAGE® Sestamibi thatwas submitted.

 

TheCompany also announced on July 25, 2007 the filing of DRAXIMAGE®Sestamibi with European regulatory authorities. The filing marks another milestone in the comprehensive plan to pursuemajor MPI markets globally.

 

TheCompany also filed an Abbreviated New Drug Submission (“A/NDS”) for DRAXIMAGE®Sestamibi on August 17, 2007 with Health Canada.  On October 11, 2007, the Company wasinformed by Health Canada that this submission had been screened and foundacceptable for review.

 

Thefiling of the ANDA with the FDA, the A/NDS and the submission to the Europeanregulatory authorities represented the achievement of key milestones in theDRAXIMAGE® Sestamibi project schedule.

 

On December 20,2007, DRAXIS announced that DRAXIMAGE, its radiopharmaceutical division, hasappointed GE Healthcare, an industry leader in nuclear medicine, as the exclusivedistributor of DRAXIMAGE® Sestamibi in the U.S. DRAXIMAGE®Sestamibi is a generic kit for the preparation of Technetium (Tc-99m) Sestamibiinjection, a diagnostic cardiac imaging agent used in MPI to evaluate bloodflow to the heart.

 

DRAXIMAGEhas granted GE Healthcare the exclusive right to market, distribute and sellits generic DRAXIMAGE® Sestamibi in the U.S. market and through itsU.S. and Canadian radiopharmacy network once the primary innovator patentexpires and marketing authorizations are received from the FDA and HealthCanada. Furthermore, GE Healthcare has agreed to purchase Technetium (Tc-99m)Sestamibi injection exclusively from DRAXIMAGE. The initial term of thedistribution agreement is for a minimum of three years following FDA approvalof DRAXIMAGE® Sestamibi.

 

*TechnetiumGenerators*

Asecond opportunity that is currently being pursued by DRAXIMAGE is theproduction and distribution of MOLY-FILLÔ, a “next-generation” version of a Technetium Generator, which is thesource of Technetium in virtually every radiopharmacy worldwide. Nearly 90% ofgenerators are located in radiopharmacies, with the rest located in otherinstitutions, such as hospitals and clinics. DRAXIMAGE is in discussionswith potential development, marketing and manufacturing partners for itsMOLY-FILLTM Generator.  During the fourthquarter of 2007, the Company completed a test evaluation of the prototypeversion of this product filed and the results of the evaluation will contributeto the continuing product development process.

 

*EuropeanEntry*

DRAXIMAGEis continuing its efforts to obtain registrations in European markets for fourof its existing products that are currently approved and sold in Canada or theU.S. In February 2005, DRAXIMAGE received approval from the Dutchregulatory authority for its Kit for the Preparation of Technetium Tc-99mAlbumin Aggregated Injection (“MAA Kit”). Initial approval in the Netherlandsallowed DRAXIMAGE to initiate the Mutual Recognition Procedure (“MRP”) inpursuit of further regulatory approvals for this product in several additionalEuropean Union countries. This MAA Kit has since been approved in Germany,the United Kingdom, Belgium, Austria and Luxembourg.  

 

62

----

 

DRAXIMAGE MDP, a product used for bone imaging, hasbeen approved in the Netherlands, and Sodium Iodide I-131 therapeutic capsulesfor the treatment of thyroid cancer has been approved in Denmark.

 

Additionalinitial European approvals for the majority of other diagnostic imagingproducts are anticipated during 2008. DRAXIMAGE has expanded its discussionswith respect to potential commercial partners to target the European marketsvia strategic alliances. Strategic alliances could also potentially serve as ameans for DRAXIMAGE to expand its product catalogue in North America as well asEurope. The Company expects discussions to continue during 2008.

 

*Others*

On August 22,2007, DRAXIMAGE announced that it had established a research collaborationagreement with Med Discovery of Switzerland to explore the combination of MedDiscovery’s targeted protein therapeutics with DRAXIMAGE’s radiopharmaceuticalexpertise in the therapeutic and diagnostics field.

 

MedDiscovery’s lead proteins are themselves potential therapeutic agents for prostatecancer and a variety of other cancers. Initially, this collaboration willprovide for the radiolabelling of certain Med Discovery’s proteins by DRAXIMAGEto assess the enhancement of their therapeutic action and their capability todetect micro tumors.  The proteins willbe produced at Med Discovery’s facility in Switzerland and radiolabelled byDRAXIMAGE in Canada.

 

DRAXIMAGEhas also identified additional new product opportunities in the area ofnon-radioactive contrast media that are used in the medical imaging field, andis pursuing potential product development strategies to leverage both itsposition in the marketplace and its preferred access to appropriate productionprocess expertise.  Contrast mediaproducts are injectable liquids produced in highly specialized cGMP sterileproduction facilities, such as those in place at DRAXIS’ facilities, which arecurrently used to produce certain diagnostic imaging products marketed byDRAXIMAGE. The North American market for contrast media has been estimated tobe valued at approximately $1.6 billion, and we believe that it is growinglargely because of the continued growth of computer tomography (“CT”) andenhanced magnetic resonance imaging (“MRI”) procedures.

 

DRAXIMAGEhas received approval from the FDA to run two clinical trials using radioactiveIobenguane I-131 Injection (also known as 131I-metaiodobenzylguanidine, orI-131 MIBG) to treat high-risk neuroblastoma, a rare form of cancer that mostlyaffects infants and young children.

 

DRAXIMAGEis providing I-131 MIBG for two clinical trials approved by the FDA under anInvestigational New Drug (“IND”) application. One trial is a Phase II study inwhich I-131 MIBG is being administered with intensive chemotherapy andautologous stem cell rescue for high-risk neuroblastoma patients. The secondtrial is a Phase I study in which irinotecan and vincristine, two commonchemotherapy agents, are being administered in combination with I-131 MIBG todetermine safety and tolerability in patients with resistant/relapsed high-riskneuroblastoma.  Both trials are currentlyunder way.

 

**Comparison of YearsEnded December 31, 2006 and 2005**

 

Revenuesfor the year ended December 31, 2006 increased by 11% (or close to 20%excluding brachytherapy products, which the Company stopped selling late in2005) compared to 2005, primarily as a result of the increase in product salesfrom radioiodine products and, specifically, Sodium Iodide I-131 sales to theU.S., including diagnostic capsules. The increase is related to higher volumesresulting from greater U.S. market penetration.

 

63

----

 

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

 

For theyear ended December 31, 2006, product gross margin increased to 63% forthe year ended December 31, 2006 compared to 2005, reflecting the positiveimpact of Sodium Iodide I-131 sales and the strategic focus on higher marginproducts that led to the divestment of the brachytherapy product line in late2005.

 

R&Dexpenditures for the year ended December 31, 2006 as compared to 2005increased 13% due to the ramping up of product development activities, inparticular activities related to DRAXIMAGE® Sestamibi and TechnetiumGenerators.

 

SG&Aexpenses decreased by $0.3 million for the year ended December 31, 2006compared to 2005 due mainly to one-time costs relating to the Company’s exit fromthe brachytherapy business during the fourth quarter of 2005.

 

Operatingincome increased 47% to $5.6 million for 2006 as compared to 2005, driven byincreased volumes and margins as described above.

 

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

 

**Contract Manufacturing***(in thousandsof U.S. dollars) (U.S. GAAP)*
| ** **                    | ** ** | **2007**   | *** *** | **2006**     | ** ** | **2005**   | ** ** |
|-------------------------------|------------|------------|--------------|--------------|------------|------------|------------|
|                          |       | ** ** | *** *** |         |       |       |       |
| **Revenues**                  | ** ** | ** ** | *** *** | ** **   | ** ** | ** ** | ** ** |
| Product sales                 |       | **$**      | **54,926**   | *** *** | $          | 64,731     |       | $ | 54,743 |   |
|                          |       | ** ** | *** *** |         |       |       |       |
| Product gross margin          |       | **$**      | **13,390**   | *** *** | $          | 23,215     |       | $ | 14,628 |   |
| *% of Product sales revenues* | * *   | ***24.4*** | *%*          | *35.9*       | *%*        | *26.7*     | *%*        |
| SG&A                      |       | **(6,362** | ***)***      | (6,487       | )          | (5,086     | )          |
| Depreciation and amortization |       | **(4,390** | ***)***      | (3,688       | )          | (3,105     | )          |
| Operating income              |       | **$**      | **2,638**    |         | $          | 13,040     |       | $ | 6,437 |   |
| *% of Revenues*               | * *   | ***4.8***  | *%*          | *20.1*       | *%*        | *11.8*     | *%*        |

 

Manufacturingcomprises the Company’s manufacturing division, DRAXIS Pharma, which is apharmaceutical contract manufacturer with capabilities in a broad range ofdosage forms, specializing in liquid and lyophilized (freeze-dried) injectablesand other sterile products. Operating out of a cGMP-compliant 247,000square-foot facility located in Montreal, Canada, DRAXIS Pharma manufacturescertain pharmaceutical products (specifically, cold kits) for DRAXIMAGE, as wellas for over 20 other pharmaceutical clients in many internationaljurisdictions.

 

 

64

----

** **

** **

**Comparison of Years Ended December 31,2007 and 2006**

 

For theyear ended December 31, 2007, revenues decreased by $9.8 million, or 15%,over the same period of 2006. The decrease was due to lower sterilemanufacturing volumes, principally related to *Hectorol*®for Genzyme as well as a return to historical volumes under the GSK contract,following a ramp-up in late 2006 due to one-time increases in demand.

 

Duringlate 2007, the contract manufacturing division of DRAXIS continued to implementprocedures to reduce production delays that have in the past resulted inshipments not being released in a timely manner impacting quarterly results formost of 2007. While the Company has made improvements in expediting the processtimes for orders, shifting customer shipment schedules and reprioritization ofprojects associated with organizational changes, the improvements made to-datepartially removed the backlog of built-up demand. The procedures being put inplace to remove the backlog of demand to improve the product release cycle areexpected to improve operating performance on a quarter by quarter basis.

 

Inaddition, volumes for 2007 were $1.0 million below the Company’s expectationsdue to a decision of a non-sterile customer to reduce its supply chaininventory levels for 2007. The impact is expected to be a one-time reduction involumes for these non-sterile products with volumes returning to historicallevels thereafter.

 

As aresult of the signing of its material manufacturing contract with JJC fornon-sterile products, the Company’s non-sterile production areas continue toundergo significant activities to support product transfer requirements relatedto this manufacturing contract. Included in this segment’s revenues areapproximately $2.6 million for 2007 in completed product transfer activitiesrelated to the Company’s new Johnson & Johnson Consumer contract.  See “New Johnson & Johnson ConsumerContract.”

 

Sterileproducts represented 70% of total contract manufacturing revenues for 2007compared to 80% for the year ended December 31, 2006.

 

Productgross margin percentage decreased to 24% for the year compared to 36% for thesame period of 2006. The decrease was driven by lower sterile volumes impactingmargins through lower plant utilization and a lower percentage of sterilevolumes as part of the overall product mix.

 

SG&Aexpenses for 2007 as compared to 2006 were flat as total severances costs of$1.6 million were offset by the revaluation of incentive awards based oncurrent financial performance and cost savings related to head countreductions.

 

Depreciationand amortization for all of 2007 increased compared to the same period of 2006,due to completion in 2007 of the installation and implementation of a newwarehouse management system which was part of the overall upgrade of theCompany’s existing SAP platform and IT infrastructure.

 

Operatingincome for 2007 was $2.6 million compared to operating income of $13.0 millionfor the same period in 2006 due to lower sterile volumes and increasedseverance costs, partially offset by a revaluation of incentive awards.

 

*NewJohnson & Johnson Consumer Contract*

Duringthe third quarter of 2007, the Company announced it had expanded its existingcontract manufacturing relationship with Johnson & Johnson Consumerand entered into a new definitive supply agreement to provide commercialmanufacturing services for a broad portfolio of multiple non-sterile specialtysemi-solid products currently marketed in the U.S.

 

 

 

65

----

 

 

The newmulti-year contract runs to the end of 2013. It includes approximately twoyears of manufacturing site transfer and process validation activities followedby five years of commercial production, which is scheduled to begin in 2009.Commercial production is expected to generate incremental revenues in excess of$120 million over the five-year period of 2009 through 2013. The transfer ofequipment and production technologies, which is in progress, is expected togenerate additional cumulative revenues during 2007 and 2008 of approximately$6 to $8 million. The contract also contemplates optional extensions beyond2013.

 

*FDAInspections*

*January 2007Inspection*

TheCompany announced it received a notification from the FDA that the Company’smanufacturing operations in Montreal, Quebec continue to maintain theirclassification as acceptable facilities following an extensive inspection bythe FDA in January 2007 of all six production and quality systems for thecontract manufacturing division.

 

*October 2007Inspection*

TheCompany also received notification from the FDA that the Company’smanufacturing operations in Montreal, Quebec continue to maintain theirclassification as acceptable facilities following an extensive inspection bythe FDA in October 2007.  The successful inspection was conductedprimarily with regard to two products manufactured on behalf of clients in theDRAXIS Pharma sterile lyophilization (freeze-drying) production facility and inDRAXIS Health’s radiopharmaceutical business unit, DRAXIMAGE. There were no Form 483Inspectional Observations issued during the FDA evaluation of DRAXIS’ systems.

 

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

 

Asstated in prior disclosures, beginning in March 2006, production run ratesin the sterile area were back at levels expected for the contract manufacturingoperations prior to the shutdown issues of late 2005, and actually exceededprevious normalized levels in part due to the contribution of the secondlyophilization unit, which came on line in 2005. The impact of the extendedshutdown in 2005 also negatively affected results for the fourth quarter of 2005.Since the shutdown for 2006 was completed in the third quarter of 2006 asplanned, fourth quarter results for 2006 as compared to 2005 were significantlystronger.

 

For theyear ended December 31, 2006, revenues increased by $10.0 million, or 18%,over 2005. The increase was due to increased commercial production of *Hectorol®**Injection* forGenzyme growth in GSK volumes and increases in lyophilized product production.

 

For theyear ended December 31, 2006, sterile volumes accounted for 80% of productrevenues compared to 76% for 2005.

 

Productgross margin percentage for the year ended December 31, 2006 increased to36% compared to 27% for 2005, driven by a higher ratio of sterile tonon-sterile product revenues and the dilutive impact of the extended shutdownon 2005 product gross margins. The extended shutdown period in 2005 negativelyaffected product gross margin percentage by at least 5% during the second halfof 2005.

 

For theyear ended December 31, 2006, SG&A expenses rose by $1.4 millioncompared to 2005 as a result of incentive plan accruals, the provision for pastdue receivables and process improvement initiatives, including informationsystem and technology initiatives. Historically, the Company has not 

 

 

66

----

 

 

incurred significant provisions for past duereceivables. SG&A expenses are also inflated for the year ended December 31,2006 by the strengthening of the Canadian dollar relative to the U.S. dollarfor most of 2006 (relative to 2005), since the vast majority of SG&Aexpenses are denominated in Canadian dollars.

 

Depreciationand amortization for the year ended December 31, 2006 increased 19% over2005, due principally to completed capital projects in 2005, which provided forincreased lyophilization and autoclave capacity.

 

Operatingincome for all of 2006 increased to $13.0 million (20% of revenues) compared to$6.4 million (12% of revenues) for 2005. The increase was driven by higherproduct sales and product gross margins, partially offset by higher SG&Aexpenses.

 

**Corporate and Other***(in thousandsof U.S. dollars) (U.S. GAAP)*
| ** **                        | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|------------|------------|
|                              |       | ** ** |       |       |       |       |       |
| **Revenues**                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product sales                     | ** ** | **$**      | **686**    |       | $          | 295        |       | $ | 499 |   |
| Intercompany eliminations         | ** ** | **(2,756** | **)**      | (2,989     | )          | (1,543     | )          |
| Royalty and licensing             | ** ** | **2,668**  |       | 2,124      |       | 3,134      |       |
| *Anipryl®*deferred  revenues | ** ** | **120**    |       | 3,301      |       | 3,301      |       |
|                              | ** ** | **$**      | **718**    |       | $          | 2,731      |       | $ | 5,391 |   |
|                              |       | ** ** |       |       |       |       |       |
| Product gross  margin             | ** ** | **88**     |       | (186       | )          | (68        | )          |
| SG&A                          | ** ** | **(7,063** | **)**      | (8,558     | )          | (6,439     | )          |
| Depreciation and  amortization    | ** ** | **(355**   | **)**      | (337       | )          | (393       | )          |
| Operating loss                    | ** ** | **$**      | **(4,542** | **)**      | $          | (3,656     | )          | $ | (465 | ) |

 

TheCorporate and Other segment comprises: amortization of deferred revenues,royalties and expenses associated with the Company’s business agreements withPfizer Inc. with respect to *Anipryl*®;revenues related to royalties and milestones from Shire in connection with thedivestiture of DRAXIS Pharmaceutica; non-allocated corporate expenses; andintercompany eliminations.  The Companyfollows a policy of not allocating its central corporate expenses to itsoperating business segments.

 

**Comparison of Years Ended December 31,2007 and 2006**

 

Revenuesrelated to the corporate segment were $2.0 million lower for 2007 compared to2006 due mainly to the termination of the amortization of the vast majority of *Anipryl*® deferred revenues on December 31,2006. This was partially offset by the receipt of contingent milestone paymentsof $0.8 million from Shire in the first quarter of 2007.

 

Intercompanyeliminations (related to the manufacture of lyophilized products by thecontract manufacturing segment for the radiopharmaceutical segment) vary as thelevel of intercompany sales vary but do not impact segmented profitability.

 

Depreciationand amortization expense in this segment for 2007 was flat as compared to thesame periods of 2006. Fluctuations are generally driven by changes to exchangerates.

 

 

67

----

 

 

SG&Aexpenses decreased $1.5 million for 2007 compared to 2006 due to the reducedcosts related to employee short- and long-term incentive plans (includingrevaluation of the Deferred Share Unit Plan) which more than offset $0.7million of severance costs in the fourth quarter of 2007.

 

Operatingloss for this segment was $0.9 million greater for 2007 relative to the sameperiod of 2006 as the decrease in *Anipryl*®deferred revenues was only partially offset by a reduction in corporateSG&A expenses.  Severances costs inSG&A expense as described above were more than offset by reduced costsrelated to employee short- and long-term incentive plans.

 

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

 

Corporaterevenues for the year ended December 31, 2006 were $2.7 million lowercompared to 2005 due to the receipt of a contingent milestone payment of $0.9million from Shire included in 2005 results and higher intercompanyeliminations. Intercompany eliminations increased for the year ended December 31,2006 compared to 2005 due to higher volumes of cold kits manufactured by thecontract manufacturing segment for the radiopharmaceutical segment.

 

As indicatedin prior disclosures, substantially all deferred revenues related to theamortization of previously received *Anipryl*®milestones terminated on December 31, 2006. The amortization of thesedeferred revenues has previously resulted in non-cash revenues of $0.8 millionper quarter or $3.3 million per year.

 

Depreciationand amortization expense in this segment in 2006 was relatively flat ascompared to 2005 since the Company had fully amortized product rights relatedto the SpectroPharmÒ line in January 2005.

 

Operatingloss for the year ended December 31, 2006 was $3.2 million higher than for2005 due to the receipt of a contingent milestone payment of $0.9 million fromShire included in 2005 results, the inclusion of stock-based compensation costsin SG&A expenses, effective January 1, 2006, and increased incentiveaccruals for 2006.

 

**Corporate Matters**

*OrganizationalChanges*

In July 2007,the Company announced senior level organizational changes designed to furtherstreamline the Company’s leadership and better reflect the core operatingbusinesses in Montreal.  The Companyrecorded severance charges in the contract manufacturing segment of $0.6million which impacted results by approximately 1 cent per share in the thirdquarter of 2007.  The Company continuedto challenge its current organizational structure to reduce its overhead coststructure and additional severance provisions of $1.7 million (or approximately3 cents per share) were taken in the fourth quarter of 2007.  The severance provisions include thoserelated to the decision to close the Company’s Mississauga, Ontario office inthe first quarter of 2008.

 

*NewCEO and COO*

TheBoard of Directors of DRAXIS appointed Mr. Dan Brazier as the newPresident and Chief Executive Officer effective January 1, 2008.  In addition, the Board appointed Mr. Jean-PierreRobert to the position of Chief Operating Officer of DRAXIS Health Inc.,effective January 1, 2008.  Mr. Robertis also the President of DRAXIS Specialty Pharmaceuticals Inc. (“DSPI”).

 

 

68

----

 

On October 31,2007, the Company had announced that Dr. Martin Barkin informed the Boardof Directors that he would retire as the President and Chief Executive Officerof the Company effective December 31, 2007.  For the period of January 1, 2008 to January 9,2009, he will act as a Special Advisor to the Board of the Company.

 

*NormalCourse Issuer Bids*

On December 7,2005, the Board of Directors of the Company authorized the repurchase forcancellation of up to 3,522,530 of its common shares through a Normal CourseIssuer Bid, which represented 10% of the public float on December 6,2005.  In accordance with the rules ofthe Toronto Stock Exchange (“TSX”), such purchases could begin on December 15,2005 and end no later than December 14, 2006.

 

TheCompany received approval from the TSX on December 18, 2006 to renew itsNormal Course Issuer Bid (the “2006 Issuer Bid”) until December 19, 2007.

 

Noshares were purchased in 2006 in accordance with the 2006 Issuer Bid.  As at December 19, 2007, the date of thetermination of the 2006 Issuer Bid, the Company had repurchased 130,100 commonshares under the 2006 Issuer Bid.

 

DRAXIShas received approval from the TSX for its Normal Course Issuer Bid (the “2008Issuer Bid”) to purchase up to 4,072,054 common shares, which representapproximately 10% of the 40,720,539 common shares in the public float as at January 14,2008.

 

The2008 Issuer Bid will end no later than January 20, 2009 or earlier if theCompany purchases the maximum allowable number of common shares. All shareswill be purchased through the facilities of the TSX and will be cancelled.  Subject to any block purchases made inaccordance with the rules of the TSX, the Company is subject to a dailyrepurchase restriction of 23,084 common shares, which represents 25% of theaverage daily trading volume of the Company’s common shares for the six monthsended December 31, 2007.

 

Anypurchases made pursuant to the 2008 Issuer Bid will be made in accordance withthe rules of the TSX and will be made at the market price of the commonshares at the time of the acquisition. As of March 18, 2008, the Company had not purchased any commonshares under the 2008 Issuer Bid.

 

*Permax®Litigation*

On July 22,2005, the Company announced that, together with other defendants, it hadreceived a Statement of Claim filed before the Superior Court of Justice ofOntario wherein the plaintiff alleges that *Permax*®,a drug that the Company distributed in Canada for a third-party manufacturerprior to July 2003, causes “compulsive/obsessive behaviour, includingpathological gambling.” The plaintiff is seeking to have this action certifiedas a class action.  The Company believesthis claim against it is without merit and intends to vigorously defend thisproceeding and any motion for certification. Prior to July 2003, *Permax*®was distributed in Canada by DRAXIS Pharmaceutica, the Canadian pharmaceuticalsales and marketing division of the Company. In July 2003, the Companycompleted the divestiture of the DRAXIS Pharmaceutica division to Shire. Noprovisions have been taken pursuant to this claim.

 

On February 29,2008, the plaintiff served an Amended Statement of Claim and a Motion Record insupport of the plaintiff’s motion for certification of this action as a classproceeding.  The defendants must file aresponse to plaintiff’s motion for certification by July 31, 2008.

 

 

69

----

 

* *

*DisclosureControls and Procedures*

As of December 31,2006 and 2007, an evaluation was carried out, under the supervision of and withthe participation of management, including the President and Chief ExecutiveOfficer and the Chief Financial Officer, of the effectiveness of the Company’sdisclosure controls and procedures as defined in Multilateral Instrument 52-109,pursuant to Canadian regulatory requirements and in Rule 13a-15(e) or15d-15(e) under the *U.S. SecuritiesExchange Act* of 1934, as amended (the “*Exchange Act*”).  Basedon that evaluation, the President and Chief Executive Officer and the ChiefFinancial Officer concluded that the design and operation of these disclosurecontrols and procedures were effective.

 

During2006 and 2007, the Company completed an evaluation of the design of internalcontrols over financial reporting as required under Multilateral Instrument52-109 and Rule 13a-15(e) or 15d-15(e) of the *Exchange Act*. Based on the results of theevaluation, the President and Chief Executive Officer and Chief FinancialOfficer concluded that the internal controls over financial reporting are designedto provide reasonable assurance that the Company’s Consolidated FinancialStatements for external purposes in accordance with U.S. GAAP arereliable.  See Item 15 — Controls andProcedures.

 

TheCompany has concluded that during the fiscal years ended December 31, 2007and December 31, 2006, there were no changes made to internal controlsover financial reporting that have materially affected, or are reasonablylikely to materially affect, the Company’s internal controls over financialreporting.

 

***Liquidity and CapitalResources***(in thousands of U.S. dollars) (U.S. GAAP)
| *Years  ended December 31*          | ** ** | **2007**   | ** **  | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------|------------|------------|-------------|----------|------------|----------|------------|
|                                     |       | ** ** |        |     |       |     |       |
| Cash and cash  equivalents               |       | **$**      | **24,796**  |     | $          | 21,446   |       | $ | 12,390 |   |
| Restricted cash                          |       | **$**      | **1,326**   |     | —     |     | —     |   |
| Non-financial  working capital (net)(1)  |       | **$**      | **21,252**  |     | $          | 21,247   |       | $ | 18,890 |   |
| Total debt  (current and long term)      |       | **—** |        | —   |       | —   |       |
|                                     |       | ** ** |        |     |       |     |       |
| Cash flows from  operating activities    |       | **$**      | **12,551**  |     | $          | 16,450   |       | $ | 9,717 |   |
| Cash flows used  in investing activities |       | **$**      | **(13,394** | )        | $          | (5,993   | )          | $ | (4,380 | ) |

----

| (1) | *Excluding  cash and cash equivalents, restricted cash, current portion of deferred  revenues and customer deposits**.* |
|-----|-------------------------------------------------------------------------------------------------------------------------|

 
| ** **                                        | ** ** | **Feb 29, 2008** | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------------------------------|------------|------------------|------------|------------|------------|------------|------------|------------|------------|
|                                              |       |             |       |       |       |       |       |       |       |
| Common shares  issued and outstanding             | ** ** | **42,062,538**   |       | 42,062,538 |       | 41,522,138 |       | 41,588,005 |       |
| Warrants issued  and outstanding(2)               | ** ** | **—**       |       | —     |       | —     |       | 1,526,718  |       |
| Stock options  outstanding                        | ** ** | **2,135,828**    |       | 1,875,828  |       | 2,257,995  |       | 2,652,620  |       |
| Outstanding  options as a % of outstanding shares | ** ** | **5.1**          | **%**      | 4.5        | %          | 5.4        | %          | 6.4        | %          |

----

| (2) | *Each whole warrant entitled the holder to  acquire one common share at a price of CDN$8.50, subject to certain  adjustments, any time prior to April 24, 2006. All warrants expired  unexercised on April 24, 2006.* |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Cashand cash equivalents at December 31, 2007 totalled $24.8 million ascompared with $21.4 million as at December 31, 2006.  The increase is attributable to thecumulative effect of cash earnings of the Company and proceeds from theexercise of stock options and customer financing, offset by capitalexpenditures. Cash and cash equivalents as of December 31, 2006 totalled$21.4 million as compared with $12.4 million as of December 31, 2005.  The increase was attributable to theincreasing cash earnings of the Company and proceeds from the exercise of stockoptions, offset by capital expenditures and funds used to buy back theCompany’s shares under the 2006 Issuer Bid.

 

 

70

----

 

 

TheCompany follows a policy of investing its surplus cash resources in highquality, liquid, short-term commercial paper and government treasury bills andmoney market mutual funds, which invest in high quality short-termsecurities.  All investments as of December 31,2007 and 2006 had less than three months maturity.  As at December 31, 2007 and 2006, therewere no restrictions on the flow of these funds nor have any of these fundsbeen committed in any way.

 

For theyear ended December 31, 2007, cash flows from operating activities were$12.6 million compared to $16.4 million for the same period of 2006.  The decrease was related to lower cashearnings in the contract manufacturing segment.

 

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

 

TheCompany believes it has sufficient working capital to meet its presentoperational requirements.

 

Non-financialworking capital, comprising accounts receivable, inventories, prepaid expenses,current deferred income tax assets, accounts payable and accrued liabilities,as at December 31, 2007 remained relatively unchanged compared to December 31,2006 due to a significant reduction in outstanding receivables related to lowervolumes for 2007, offset by increases in semi-finished and finished inventorylevels in the contract manufacturing segment.

 

Non-financialworking capital, comprising accounts receivable, inventories, prepaid expenses,current deferred income tax assets, accounts payable and accrued liabilities,as at December 31, 2006 increased compared to December 31, 2005 duemainly to increased receivable levels related to volume growth and timing ofcollection of receivables.

 

Capitalexpenditures during 2007 and the increase compared to 2006 are mainlyattributable to the JJC supply agreement signed in the third quarter of 2007,information technology and SAP platform upgrades and a new warehouse managementsystem.

 

Capitalexpenditures for the year ended December 31, 2006 are mainly attributableto expenditures to improve operating efficiencies in production areas and toincrease manufacturing capacity and infrastructure upgrades, namely to theCompany’s information technology and SAP platforms.

 

Proceedsfrom the issuance of treasury common shares by the Company attributable to theexercise of options generated $2.1 million for the year ended December 31,2007 compared with $1.9 million and $1.6 million for 2006 and 2005respectively.

 

During2007, 130,100 shares were purchased under the 2006 Issuer Bid (which terminatedon December 19, 2007) at a cost of $686,000.

 

 

 

71

----

 

 

The following tablesummarizes the Company’s major contractual cash obligations as of December 31,2007:

 

**ContractualObligations**
| ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Payment due by end of:** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **Total**  | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010**                   | ** ** | **2011**   | ** ** | **2012**   | ** ** | **Thereafter** | ** ** |
| Operating leases               |       | 3,955      |       | 399        |       | 595        |       | 570                        |       | 566        |       | 566        |       | 1,259 |   |
| Service  contracts             |       | 1,339      |       | 591        |       | 358        |       | 193                        |       | 124        |       | 60         |       | 13 |   |
| Total contractual  obligations |       | 5,294      |       | 990        |       | 953        |       | 763                        |       | 690        |       | 626        |       | 1,272 |   |

 

Allcontractual obligations related to 2007 and 2006 were fully paid as of December 31,2007 and December 31, 2006, respectively.

 

Inaddition to the above, the Company may be obligated to make certain royaltypayments based on related product sales and milestone payments based on theachievement of certain specified events.

 

Theamount, timing and likelihood of these royalty payments are not determinable asthey mainly relate to products being developed and not yet approved by theapplicable regulatory authorities.

 

***Bank Financing***

TheCompany chose not to renew its credit facilities upon their scheduledexpiration date in June 2007. The Company plans to explore new creditfacility arrangements in conjunction with new business opportunities. TheCompany believes that its current cash position and cash flows are sufficientto achieve the Company’s business plans.

 

***Customer Financing***

During2007, the Company received $1.6 million in U.S. dollar-denominated customerfinancing related to capital installation activities being performed totransfer in products to the contract manufacturing operations under theCompany’s new contract with a major customer. The customer financing will bedrawn down as commercial batches are produced under the contract. The customerfinancing will be secured by the specific capital installations made inpreparation for this contract.

 

***Off-Balance SheetArrangements***

TheCompany does not have any off-balance sheet arrangements that have, or arereasonably likely to have, a current or future effect on the Company’sfinancial condition, changes in revenues or expenses, results of operations,liquidity, capital expenditures or capital resources that are material toinvestors.

 

***Related PartyTransaction***

* *

TheCompany paid rent of $131,000 during 2007 (2006 - $127,000; 2005 - $123,000) toa company controlled by a member of the Board of Directors, related to thelease of its registered office location.

 

Thistransaction is in the normal course of operations and is measured at theexchange amount as agreed to by the parties based on market rates per squarefootage for similar space. The lease expired in May 2006, and leasepayments continue on a monthly basis. The Company terminated the lease and willvacate the premise as part of the closing of the Mississauga office location inthe first quarter of 2008.

 

 

72

----

 

 

***SELECTED CONSOLIDATEDANNUAL INFORMATION***

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

 
| ** **                             | ** ** | **2007**   | ** **  | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------|------------|------------|-------------|----------|------------|----------|------------|
|                                   |       | ** ** |        |     |       |     |       |
| **Revenues**                           |       | ** ** |        |     |       |     |       |
| Product sales                          |       | **$**      | **76,072**  |     | $          | 83,545   |       | $ | 72,989 |   |
| Royalty and licensing                  |       | **2,668**  |        | 2,121    |       | 3,143    |       |
| *Anipryl®* deferred revenues      |       | **120**    |        | 3,301    |       | 3,301    |       |
|                                   |       | **$**      | **78,860**  |     | $          | 88,967   |       | $ | 79,433 |   |
|                                   |       | ** ** |        |     |       |     |       |
| **Net  income**                        |       | **$**      | **1,658**   |     | $          | 11,547   |       | $ | 7,784 |   |
| ** **                             |       | ** ** |        |     |       |     |       |
| **Basic  earnings per share**          |       | **$**      | **0.04**    |     | $          | 0.28     |       | $ | 0.19 |   |
| ** **                             |       | ** ** |        |     |       |     |       |
| **Diluted  earnings per share**        |       | **$**      | **0.04**    |     | $          | 0.28     |       | $ | 0.18 |   |
|                                   |       | ** ** |        |     |       |     |       |
| Total assets                           |       | **$**      | **127,934** |     | $          | 105,962  |       | $ | 95,820 |   |
| Total long-term  financial liabilities |       | **$**      | **3,299**   |     | $          | 990      |       | $ | 308 |   |

 

**SUMMARYOF QUARTERLY RESULTS**

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

* *
| ** **                                    | ** ** | **Q4, 2007** | ** ** | **Q3, 2007** | ** ** | **Q2, 2007** | ** ** | **Q1, 2007** | ** ** | **Q4, 2006** | ** ** | **Q3, 2006** | ** ** | **Q2, 2006** | ** ** | **Q1, 2006** | ** ** |
|-----------------------------------------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|--------------|------------|
|                                          |       | ** **   |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| **Revenues**                                  |       | ** **   |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| Product sales                                 |       | **$**        | **20,024** |         | $          | 17,370       |       | $            | 19,048     |         | $          | 19,630       |       | $            | 23,106     |         | $          | 19,788 |   | $ | 23,003 |   | $ | 17,648 |   |
| Royalty and licensing                         |       | **433**      |       | 558          |       | 359          |       | 1,318        |       | 465          |       | 617          |       | 437          |       | 603          |       |
| *Anipryl®* deferred revenues             |       | **30**       |       | 30           |       | 30           |       | 30           |       | 825          |       | 825          |       | 825          |       | 825          |       |
|                                          |       | **$**        | **20,487** |         | $          | 17,958       |       | $            | 19,437     |         | $          | 20,978       |       | $            | 24,396     |         | $          | 21,230 |   | $ | 24,265 |   | $ | 19,076 |   |
|                                          |       | ** **   |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| Net (loss)  income                            |       | **$**        | **(551**   | )            | $          | (1,376       | )          | $            | 1,575      |         | $          | 2,010        |       | $            | 3,687      |         | $          | 2,604 |   | $ | 3,564 |   | $ | 1,692 |   |
|                                          |       | ** **   |       |         |       |         |       |         |       |         |       |         |       |         |       |         |       |
| Basic and diluted (loss)   earnings per share |       | **$**        | **(0.01**  | )            | $          | (0.03        | )          | $            | 0.04       |         | $          | 0.05         |       | $            | 0.09       |         | $          | 0.06 |   | $ | 0.09 |   | $ | 0.04 |   |

 

**MAJORTRENDS IN QUARTERLY NUMBERS**

*The quarterly numbers reflected in the table above reflectthe significant trends described below. For more detailed explanations, pleaserefer to management’s discussion and analysis of financial condition andresults of operations (“MD&A”), filed on a quarterly basis on SEDAR andwith the United States Securities and Exchange Commission on Form 6-K.  The MD&A for the quarter ended December 31,2007 is incorporated herein by reference.*

 

Commencingin the second quarter of 2003, the contract manufacturing segment began asignificant ramp-up of shipments of *Hectorol*®*Injection* for Genzyme and products under its GSKmanufacturing agreements. This resulted in a positive upward trend in revenuemainly in contract manufacturing and increasing margins due to the highermargin sterile business and the financial benefits of improved capacityutilization. The major trend in revenues has been the shift in business incontract 

 

73

----

 

manufacturing where sterile product revenue occupies ahigher share of overall revenue driven by the GSK and Genzyme business. Thistrend continued through 2004 and into the third quarter of 2005. The result wasincreasing volume and associated product gross margins in contractmanufacturing.

 

However,during the third quarter of 2005, the Company’s contract manufacturingoperation extended its scheduled shutdown period at the beginning of the thirdquarter in the sterile area in order to correct an electrical panel failure andmake associated repairs.  The decision torevalidate the entire sterile area following these repairs and to recalibrateproduction schedules had material financial implications that hindered thirdand fourth quarter results in 2005. Finalizing and executing productionschedules in the fourth quarter of 2005 was further hindered by delays inreceiving some component materials from suppliers. Production in contractmanufacturing was ramping up towards normalized production levels by the end ofthe third quarter of 2005.  The overalleffect of the extended shutdown was to negatively affect the Company’s keyfinancial metrics over the second half of 2005 and offset the significantgrowth achieved over 2004 in the first half of 2005. The impact on productgross margins in the second half of 2005 was approximately 5%.  The peripheral impacts of the extendedshutdown, specifically as it related to production scheduling, impacted overallresults into February 2006.

 

BeginningMarch 2006, the Company returned to normalized production volumes. Thecontract manufacturing segment began achieving significant volume growthbeginning with the second quarter of 2006 and extending to the end of 2006. Thegrowth was driven by the sterile products area, in particular, by volume fromtwo major customers, Genzyme and GSK. In addition, the Company benefited fromthe effects of the contribution of additional lyophilization capacity for 2006,which increased sterile lyophilization volumes in 2006 relative to 2005. Thirdquarter results for 2006 reflected the impact of a normal shutdown period incontract manufacturing. As the 2006 shutdown was completed on plan, the Companywas able to return to volumes achieved in the second quarter of 2006 by thefourth quarter.

 

During2007, volumes were significantly impacted by a change in forecasted volumes byGenzyme, which resulted in an overall reduction in *Hectorol*®*Injection* volumes by $9 million (excluding currencyfluctuations) compared to 2006 levels. The volume reductions resulted in asignificant reduction in *Hectorol*®*Injection* volumes throughout 2007 with the largest impactbeing the third quarter of 2007. Volumes increased in the fourth quarter of2007 over the third quarter of 2007, but did not return to the record levels ofthe fourth quarter of 2006. In addition, volumes under the GSK contract alsodecreased over 2006 levels due to a one-time increase in volumes overhistorical levels occurring in the fourth quarter of 2006.

 

Lowercontract manufacturing margins were directly related to the reduced sterilevolumes as described above. Sterile volumes are higher margined volumescompared to non-sterile volumes.

 

In theradiopharmaceutical segment, volumes have increased since the first quarter of2003, relating to the introduction of Sodium Iodide I-131 to the U.S., and theprimary driver for growth in 2005 remained the increasing penetration of SodiumIodide I-131 in the U.S. Radioiodine sales (Sodium Iodide I-131) continued todrive sales growth in 2006 via increased U.S. market penetration, including theintroduction of diagnostic capsules into the U.S. marketplace.

 

Volumesof radioactive products produced by the radiopharmaceutical operations werelower than expected during 2007 due to a decision by a customer to temporarilysuspend production of a private label radioactive product (representing a lossof $350,000 in revenues per quarter). This decision began impacting results inthe second half of 2007.

 

Inaddition, during the second quarter of 2007, Sodium Iodide I-131 sales werereduced due to the inability of its supplier to provide radioisotopes. Analternative supplier was found and approved as a 

 

 

74

----

 

 

result. However, due to an extended shutdown at one ofthe largest global suppliers of radioactive isotopes in December, overalldemand for product was down in the fourth quarter. The extended shutdown wasover by the end of 2007.

 

Overall,margins increased in 2006 over 2005 due to the decision in late 2005 todiscontinue sales of brachytherapy products that diluted margins previously.

 

Marginsdecreased in 2007 due mainly due to a strengthening Canadian dollar, and to alesser extent, the dilutive effect of including freight charges in bothrevenues and cost of goods sold beginning with the second quarter of 2007.

 

Substantiallyall revenues related to the amortization of previously received *Anipryl*® milestones terminated on December 31,2006. The amortization of these deferred revenues previously resulted innon-cash revenues of $0.8 million per quarter, contributing approximately 7cents per share per full year. The termination of this source of non-cashrevenue and operating income has no effect on cash flows but affectsquarter-over-quarter and year-over-year comparisons of operating resultsbeginning with the first quarter of 2007 (see “Corporate and Other”).

 

Apartfrom the impact of foreign currency on the Company’s Canadian-denominatedSG&A spending, SG&A spending increased in 2005 due to costs of processimprovement initiatives commencing in the second quarter of 2005; one-timecosts associated with the exit of the brachytherapy product line, whichoccurred in the fourth quarter of 2005; and severance costs in the fourthquarter of 2005.  Effective January 1,2006, the Company included stock-based compensation costs in SG&A expensesas a non-cash item. This had the effect of lowering EPS by 0.5 cents for 2006and 2007, relative to the preceding quarter (pre-2006). Fourth quarter 2006results were impacted by accruals for long-term incentive plan awards based onthe Company’s financial performance in 2005. During 2007, SG&A expenseswere impacted relative to 2006 by lower incentive accruals related to bothshort- and long-term incentive programs. The Company incurred severance costsof approximately $0.6 million in the third quarter and $1.7 million in thefourth quarter of 2007.

 

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

 

Foreignexchange has impacted EPS by the strengthening Canadian dollar and its effecton the Company’s net monetary position held in U.S. dollars for 2007, resultingin a foreign exchange loss of $1.7 million during 2007 which mostly occurredduring the second and third quarters of 2007. The Canadian dollar weakened latein 2006 resulting in a foreign exchange gain on U.S. dollar-denominated netmonetary items.

 

Interestincome has increased and become more significant as the Company eliminated debtlevels at the end of 2004 and built up its interest bearing cash position sincethen.

 

TheCompany’s effective tax rate has been significantly below the statutory ratedue to the level of research and development spending, giving rise to taxcredits which reduce the overall tax provision of the Company. Specifically in2005, the Company benefited from the recognition of the lower effectivestatutory tax rate attributable to milestone payments received and throughwithholding tax refunds received in the year, but not previously estimated tobe recoverable, offset by changes to statutory tax rates resulting in one-timeadjustments to the deferred income tax values. As expected, during 2006 and2007 income taxes moved closer to statutory levels less the positive impact oftax credits received on R&D expenditures.

 

 

75

----

 

 

Netcash flow from operating activities continues to grow with the increasedvolumes, subject to the required investment in working capital to support theramp-up in business.  Net operating flowstend to be higher in the latter half of a year as incentive awards, insurancepayments and tax installments tend to be made early in a year.

 

Capitalexpenditures tend to rise during and after shutdown periods (usually in thethird quarter) when most installation activities take place. Informationtechnology and SAP spending to upgrade both platforms accelerated in the secondhalf of 2006. Capital expenditure spending increased in 2007 due to thecompletion of information technology and SAP platform upgrades (including a newwarehouse management system) during the first half of 2007. Spending during thesecond half of 2007 was largely related to preparation for the Company’s newbusiness coming from the JJC contract.

 

**OUTLOOK**

*The following section contains numerous forward-lookingstatements specifically pertaining to guidance. Management has included anarrative of the underlying factors and assumptions on which theforward-looking statements are based. While management believes that the basisfor these forward-looking statements is reasonable, they are based oninformation currently available to management and, accordingly, actual resultscould differ materially from the forward-looking statements (see **Forward-Looking Statements** below forfactors which could cause our results or performance to differ materially froma conclusion, forecast or projection in the forward-looking statements).*

 

TheCompany’s ability to forecast revenue over shorter-term periods, especiallyquarterly targets, is very difficult and less accurate during periods in whichsignificant changes are made to production schedules, whether due to productionissues or changes to the size or timing of customer demand. While delays inreceiving component parts are not unusual, when combined with production issuesor customer timing changes, they can significantly impact revenues compared toforecasts for a given period. Furthermore, due to the complexity of sterilemanufacturing and the rigours and demands of the quality testing and releaseprocess, anticipated shipment dates and the accompanying revenues can change fromperiod to period based on the independent quality control process.  Accordingly, the Company does not plan toprovide either specific quarterly guidance or revenue guidance.

 

**Outlookand Guidance Intentions**

** **

Guidancetargets for 2007, which were revaluated during the course of 2007, were notachieved as a result of the following factors:

 

·                  Subsequent to the second quarter of 2007, anongoing assessment of the Company’s cost structure began with the appointmentof Jean-Pierre Robert as President of DSPI, thereby responsible for theCompany’s operating units. In addition, a parallel review of the Company’scorporate overhead structure was initiated to reduce overhead costs andeliminate redundancies Company-wide. This is related to the higher cost burden associatedwith these costs as a result of the stronger Canadian dollar, the upgrade ofour SAP systems and overall plans to achieve greater efficiencies. During thecourse of 2007, the Company took severance cost provisions of $1.6 million incontract manufacturing and $0.7 million in its corporate segments as a result,including the decision to close its Mississauga office location in early 2008.

 

·                  During 2007, the strengthening of the Canadiandollar from CDN$1.165 per U.S. dollar as at December 31, 2006 to CDN$0.991per U.S. dollar as at December 31, 2007 has resulted in foreign exchangelosses for all of 2007 of approximately 3 cents per share, or $1.7 million.This foreign exchange loss resulted from the revaluation of U.S.dollar-denominated net monetary assets.

 

 

76

----

 

 

·                  Since the vast majority of the Company’s coststructure is in Canadian dollars and a larger portion of the Company’s revenuestreams is denominated in U.S dollars, the strengthening of the Canadian dollarhas a significant negative impact on the Company’s underlying gross profitmargin and operating expenses. We estimate that the strengthening of theCanadian dollar has reduced operating profitability by approximately 3 to 4cents per share on an annual basis relative to 2006.

 

·                  Volumes of radioactive products produced by theradiopharmaceutical operations were lower than expected for the second half of2007 due to a decision by a customer to cease production of a private labelradioactive product (which historically represented $350,000 in revenues per quarter),while the customer determines whether to continue to supply the market in thefuture pending possible formulation changes.

 

·                  During the course of 2007, two separateshortages for the supply of radioactive isotopes occurred which impacted thefinancial performance of the radiopharmaceutical segment. The first shortageresulted in the Company obtaining the approval of a secondary source of supplyfor the U.S. market. The second shortage created an industry-wide decrease indemand in late 2007 for radioactive procedures due to a short supply in themarketplace of radioisotopes as the key ingredient.

 

·                  *Hectorol**®* production volumes in2007 were $9 million lower than what they were in 2006 and significantly lower than what wasoriginally forecasted for 2007. It is our understanding that these volumes maystill vary materially either positively or negatively in future quarters as aresult of continued uncertainty in customer demand.  The lower than expected volumes from Genzymehave offset the positive impact of increased volumes related to new businessactivities taking place during 2007 within our contract manufacturingdivision.  We believe that the trend isfor *Hectorol*® volumes toultimately be phased out during 2009. We also anticipate quarterly fluctuationsin volume which may not be predictable.

 

Thecontract manufacturing segment began to implement procedures, including organizationalchanges, to reduce production delays that have in the past resulted inshipments not being released in a timely manner, impacting quarterly resultsfor most of 2007.

 

Whileshort-term financial performance for 2007 was below the Company’s expectations,the Company did achieve significant key milestones consistent with the sourcesof future growth for the Company in future years.

 

*Guidancefor Future Years*

TheCompany expects progressively improving financial results during 2008 comparedto 2007 as a result of increased demand through new business opportunities,product introductions and additional contracts. This is expected to result incontinuing year-over-year growth in revenues, operating income, and cash flowsgoing forward, starting from a base in 2008. Net earnings per share for 2008are expected to increase significantly over 2007.  However, the extent to which the Company canreasonably predict the financial performance for 2008 is limited due to variablesoutside of the control of the Company. Accordingly, the Company does not planto provide specific quantitative guidance given the anticipated period ofexpansion and significant growth that is expected to be accompanied by periodsof increased forecast variability due to several factors, including thefollowing:

 

·                  The timing and ramping-up of commercialproduction of non-sterile products under the new contract with Johnson &Johnson Consumer will be influenced by both the product transfer process andthe receipt of manufacturing site transfer approvals from appropriateregulatory agencies.

 

·                  We do expect revenue growth associated withproduct transfer activities for 2008 but, while such activities will generatepositive margins, the margin percentage is expected to be dilutive to overallmargins as we hire and train new personnel in anticipation of the commercialphase of the contract.

 

 

77

----

 

 

·                  Several potential new business opportunitieshave been identified as a result of increased marketing and outreach activitiesinitiated during 2007. However the rate of conversion of such opportunities tonew business contracts over the next several quarters has introduced increasedforecasting variability.

 

·                  The timing and extent of radiopharmaceutical productintroductions to European markets is highly dependent on receiving timelyregulatory approvals, although additional approvals are expected during 2008,in several different countries.  TheCompany is actively working to establish one or more appropriate marketing anddistribution partnerships, which will influence the rate at which product saleswill grow in the European Union markets.

 

·                  Revenue and earnings from the potentialintroduction of DRAXIMAGE® Sestamibi will depend on several factorsincluding regulatory approvals, competitive activity, manufacturing execution,marketing and distribution partnerships, and market acceptance followingproduct launch.  This is expected to be asignificant product for the Company and the variability around its introductionalone is expected to impact the accuracy of future forecasts for 2008 and 2009.

 

·                  The potential introduction of the MOLY-FILLTM TechnetiumGenerator is expected to be a significant event given the limited productofferings currently available, and the forecast variability associated withthis product is highly dependent on somewhat unpredictable factors includingregulatory approvals, marketing and/or distribution agreements, pricingstrategies and market penetration rates.

 

TheCompany will provide updates to the extent possible as these opportunitiesevolve and if possible quantify the potential impact of each factor as theybecome more transparent as to timing and quantum.

 

**Other**

TheBoard of Directors believes that the Company’s shares trade, from time to time,well below their real value and that the trading price of the common sharesdoes not reflect the potential inherent value in the Company’s corecompetencies.  Accordingly, as mentionedabove under “Corporate Matters”, the Board of Directors in January 2008authorized the 2008 Issuer Bid and will continue to consider other strategiesto enhance the trading value of its common shares.

 

**ACCOUNTINGMATTERS**

 

**CriticalAccounting Policies and Estimates**

Theforegoing discussion and analysis of the financial condition and results ofoperations are based upon the Company’s Consolidated Financial Statements,which have been prepared in accordance with U.S. GAAP. The preparation ofConsolidated Financial Statements requires the Company to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. On anongoing basis, the Company evaluates its estimates and makes adjustments asappropriate. Actual results may differ from these estimates.

 

Asummary of the significant accounting policies and methods used by the Companyin the preparation of its Consolidated Financial Statements is included inNotes 2 and 3 to the 2007 audited Consolidated Financial Statements. TheCompany believes the following critical accounting policies affect its moresignificant judgments and estimates used in the preparation of its ConsolidatedFinancial Statements.

 

**Recognitionof Licensing Revenue**

Licenseand other forms of non-refundable fees received pursuant to collaborationagreements are accounted for according to the related contractual agreements.In general, such fees are deferred and recognized on a straight-line basis overthe contract period. Where the contract period is not defined, such 

 

 

78

----

 

 

fees are recognized on a straight-line basis over theestimated term, during which contractual benefits are expected to be derived.If payment of such fees is contingent upon future performance obligations ofthe Company or other future events, revenue recognition of such amounts isdeferred and recognized upon completion of the specific event.

 

**DeferredTax Assets**

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

 

**Allowancefor Doubtful Accounts**

TheCompany determines an appropriate allowance for doubtful accounts based on anaccount-by-account review as opposed to a general provision assessed as apercentage of revenues.

 

**Provisionfor Inventory Obsolescence**

Provisionsfor inventory are charged against income when it is determined that specificinventory items do not meet the defined quality and regulatory requirements forsale.  The Company does not make generalprovisions for inventory obsolescence.

 

**ForeignExchange Risk**

The Company’s reportingcurrency is U.S. dollars. The functional currency for its Canadian operations -which include the radiopharmaceutical segment, the contract manufacturingsegment and royalties and milestones related to product rights sold to Shire - isthe Canadian dollar. Accordingly, the Company’s foreign exchange exposure foraccounting purposes mainly relates to U.S.-denominated monetary assets of theseoperations. The Company currently does not actively hedge this exposure, butreduces the exposure by maintaining the minimum level of U.S.-denominated cashavailable to meet its short-term cash requirements.

 

**RecentAccounting Pronouncements**

In February 2007, the Financial Accounting Standard Board (“FASB”)issued SFAS No. 159, *The Fair ValueOption for Financial Assets and Financial Liabilities*.  This statement permits entities to choose tomeasure many financial instruments and certain other items at fair value.  The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.  The Company was required to adopt theprovisions of SFAS No. 159, effective January 1, 2008.  The Company does not anticipate that theelection, if any, of this fair-value option will have a material effect on theConsolidated Financial Statements.

 

In September 2006, FASB issued SFAS No. 157, *Fair Value Measurements*.  This statement provides guidance for usingfair value to measure assets and liabilities. It also responds to investors’ request for expanded information aboutthe extent to which companies measure assets and liabilities at fair value, theinformation used to measure fair value, and the effect of fair valuemeasurements on 

 

79

----

 

 

earnings.  SFAS No. 157 applies whenever otherstandards require (or permit) assets or liabilities to be measured at fairvalue, and does not expand the use of fair value in any new circumstances. TheCompany was required to adopt the provisions of SFAS No. 157 effective January 1,2008.  The Company does not believe thatits adoption will have a material impact on the Company’s ConsolidatedFinancial Statements.

 

**Forward-LookingStatements**

ThisMD&A contains forward-looking statements within the meaning of Section 27Aof the *Securities Act of 1933*, as amended (the“Securities Act”) and Section 21E of the *SecuritiesExchange Act of 1934*, as amended (the “Exchange Act”) and ascontemplated under other applicable securities legislation.  These statements can be identified by the useof forward-looking terminology such as “may”, “will”, “expect”, “anticipate”,“estimate”, “continue”, “plan”, “intend”, “believe” or other similar words.These statements discuss future expectations concerning results of operationsor financial condition or provide other forward-looking information. Our actualresults, performance or achievements could be significantly different from theresults expressed in, or implied by, those forward-looking statements. Youshould not place undue reliance on any forward-looking statement, which speaksonly as of the date made.

 

Thesestatements are not guarantees of future performance. By their nature,forward-looking statements involve numerous assumptions, known and unknownrisks, uncertainties and other factors that may cause the actual results orperformance of the Company to be materially different from such statements orfrom any future results or performance implied thereby. Factors that couldcause the Company’s results or performance to differ materially from aconclusion, forecast or projection in the forward-looking statements include,but are not limited to:

 

·                  Those related to discussions involving apotential transaction that could lead to a sale of the Company;

 

·                  the achievement of desired clinical trialresults related to the Company’s pipeline products;

 

·                  timely regulatory approval of the Company’sproducts;

 

·                  the ability to comply with regulatoryrequirements applicable to the manufacture and marketing of the Company’sproducts;

 

·                  the Company’s ability to obtain and enforceeffective patents;

 

·                  the non-infringement of third party patents orproprietary rights by the Company and its products;

 

·                  factors beyond our control that could causeinterruptions in our operations in our single manufacturing facility(including, without limitation, material equipment breakdowns);

 

·                  reimbursement policies related to health care;

 

·                  the establishment and maintenance of strategiccollaborative and commercial relationships;

 

·                  the Company’s dependence on a small number ofkey customers;

 

·                  the disclosure of confidential information byour collaborators, employees or consultants;

 

·                  the preservation of healthy workingrelationships with the Company’s union and employees;

 

·                  the Company’s ability to grow the business;

 

·                  the fluctuation of our financial results andexchange and interest rate fluctuations;

 

·                  the adaptation to changing technologies;

 

·                  the loss of key personnel;

 

80

----

 

 

·                  the avoidance of product liability claims;

 

·                  the loss incurred if current lawsuits against ussucceed;

 

·                  the volatility of the price of our commonshares;

 

·                  market acceptance of the Company’s products;

 

·                  factors described under “Outlook” above; and

 

·                  the risks described in Item 3. Key Information -Risk Factors in this Annual Report.

 

Foradditional information with respect to certain of these and other factors, andrelating to the Company generally, reference is made to the Company’s mostrecent filings with the United States Securities and Exchange Commission(available on EDGAR at www.sec.gov) and the filings made by the Company withCanadian securities regulators (available on SEDAR at www.sedar.com).  The forward-looking statements contained inthis document represent the Company’s expectations as at March 31,2008.  Unless otherwise required byapplicable securities laws, the Company disclaims any intention or obligationto update or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

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

 

The following is a list of the current directors and senior officers ofthe Company, their province or state of residence, their current position withthe Company and their principal business activities outside the Company:

 
| **Leslie L. Dan**                       |   | Ontario,  Canada |   | Director |
|-----------------------------------------|--------|------------------|--------|----------|
| Director  since December 10, 1993. |   |             |   |     |

 

Mr. Dan is Chairman of Novopharm Limited, one of Canada’s leadingpharmaceutical companies and Chairman of Viventia Biotech Inc.  Prior to April 5, 2000, Mr. Dan wasChairman and Chief Executive Officer of Novopharm Limited.  Until July 2007, he was also a member ofthe Board of Directors of Teva Pharmaceutical Industries Limited (NASDAQ:TEVA).

 
| **George  M. Darnell**                  |   | Florida, United  States |   | Director |
|-----------------------------------------|--------|-------------------------|--------|----------|
| Director since  November 26, 1996. |   |                    |   |     |

 

Mr. Darnell is the retired President of the Dade Division and theretired Executive Vice President of the Baxter Diagnostics Group of BaxterInternational.  He has over 35 years ofU.S. and international experience in the diagnostic industry.

 
| **Rolf H.  Henel**                    |   | New Jersey,  United States |   | Director |
|---------------------------------------|--------|----------------------------|--------|----------|
| Director since  August 14, 2002. |   |                       |   |     |

 

Mr. Henel is the retired President ofCyanamid International, Lederle Division. He currently serves as an advisor to the healthcare industry and is apartner in Naimark & Associates, a healthcare consulting firm.  He is also a director and Chairman of theCompensation and Nominating and Corporate Governance Committees of SciClonePharmaceuticals, Inc. (NASDAQ: SCLN).

 
| **Brian  M. King***                |   | Ontario, Canada |   | Chairman and  Director |
|------------------------------------|--------|-----------------|--------|------------------------|
| Director since  May 26, 1994. |   |            |   |                   |

----

* Mr. Brian King will not seekre-election as a director at our next annual shareholders meeting.

 

 

81

----

 

 

Mr. King is Chairman of the Board of Directors of the Company.  He is the former Chairman and Chief ExecutiveOfficer of Connaught Biosciences, Inc. He is also a director and Chairman of the Compensation Committee of OnexCorporation (TSX: OCX) and a director and member of the Investment,Valuation and Audit Committees of VenGrowth Investment Funds.

 
| **Samuel  Sarick**                   |   | Ontario, Canada |   | Director |
|--------------------------------------|--------|-----------------|--------|----------|
| Director since  March 31, 1989. |   |            |   |     |

 

Mr. Sarick is President of Samuel Sarick Limited, a company withlong-standing involvement in commercial property development.

 
| **Bruce W.  Simpson**                 |   | Texas, United States |   | Director |
|---------------------------------------|--------|----------------------|--------|----------|
| Director since  August 14, 2002. |   |                 |   |     |

 

Mr. Simpsonserved as the President of the Genpharm division of E Merck, the President andCEO of Medeva Pharmaceuticals in the United States and in senior managementpositions at Fisons Corporation.  Hecurrently heads a private consulting firm, B.W. Simpson & Associates,specializing in marketing and business development within the healthcareindustry and is a director and member of the Compensation Committee of Hi-TechPharmacal Co., Inc. (NASDAQ: HITK).

 
| **John A.  Vivash**                     |   | Ontario, Canada |   | Director |
|-----------------------------------------|--------|-----------------|--------|----------|
| Director since  November 17, 1998. |   |            |   |     |

 

Mr. Vivash was formerly President and Chief Executive Officer ofCIBC Securities Inc., Fidelity Investments Canada Limited and ManulifeSecurities International Ltd.  Hecurrently serves as President and Chief Executive Officer of TesseractFinancial Inc., a financial services consultancy, and director and Chairman ofthe Governance and Nominating Committee of Cangene Corporation (TSX: CNJ).  He is also Vice-Chair of the Ontario Collegeof Art and Design Foundation and a member of the Board of Directors, the AuditCommittee and the Conduct Review Committee of State Street Trust CompanyCanada.

 
| **Mark  Oleksiw**              |   | Québec, Canada |   | Officer |
|--------------------------------|--------|---------------------|--------|---------|
| Officer since  July 2003. |   |                |   |    |

 

Mr. Oleksiw joined DRAXIS as Director of Finance in July 2002after eight years with an international accounting firm, most recently as asenior manager with a focus on U.S. and Canadian publicly listed life scienceand technology companies.  He also spentthree years with Bell Canada and BCE Inc. with responsibility for externalreporting, plus two years as a senior internal auditor at McGill University.  Mr. Oleksiw is a Chartered Accountantand earned his Graduate Diploma in Public Accountancy and B. Comm. from McGillUniversity.  He became Chief FinancialOfficer on July 1, 2003.

 
| **Dan Brazier**                  |   | Ontario, Canada |   | Officer |
|----------------------------------|--------|-----------------|--------|---------|
| Officer since  August 1998. |   |            |   |    |

 

Mr. Brazier, Hon. B. Comm., joined DRAXIS in August 1998 asPresident of SpectroPharm Dermatology, in October 2005, he was appointedas Chief Operating Officer, and, since January 1, 2008, holds the positionof President and Chief Executive Officer. Prior to July 1, 2003, Mr. Brazier served as President ofDRAXIS Pharmaceutica.  Prior to joiningthe Company, Mr. Brazier was the Director of Skin Care at AllerganInc.  Mr. Brazier also heldpositions in Marketing Management and Sales Management in his 10 years withAllergan.  From 1980-1989, Mr. Brazierheld Marketing and Sales positions with Bausch & Lomb, Stafford Foodsand Canada Packers. Mr. Brazier holds an Honors B. Comm., majoring inMarketing and Finance.

 

 

82

----

 

 
| **Jean-Pierre  Robert**      |   | Québec, Canada |   | Officer |
|------------------------------|--------|---------------------|--------|---------|
| Officer since May 2005. |   |                |   |    |

 

Mr. Robert, B.Sc., is Chief Operating Officer and President ofDRAXIS Specialty Pharmaceuticals Inc. Prior to joining DRAXIS, he served asVice President and General Manager of Tyco Healthcare (Canada), overseeingdomestic and export operations, following its acquisition of Mallinckrodt(Canada), where he held the same position. Most recently, Mr. Robert wasPresident and CEO of an emerging Canadian biopharmaceutical company. He hasextensive healthcare industry experience including executive, generalmanagement, marketing and sales roles involving diagnostic, pharmaceutical,chemical and laboratory products with Mallinckrodt, Fisher Scientific, Hoechstand Bayer. He holds a B.Sc. and was a member of the Canadian Society of NuclearMedicine.

 
| **Jerry  Ormiston**          |   | Ontario, Canada |   | Officer |
|------------------------------|--------|-----------------|--------|---------|
| Officer since May 2001. |   |            |   |    |

 

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

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

 

Ms. Gualtieri joined the Company in November 2003 as GeneralCounsel and Secretary.  Prior to joiningthe Company, she was a partner in the Corporate Finance Mergers &Acquisitions group of McCarthy Tétrault LLP in Montréal, Québec, one ofCanada’s largest law firms.  Between March 1996and August 1999, Ms. Gualtieri was legal counsel at Fonds deSolidarité des Travailleurs du Québec (F.T.Q.), Canada’s largestlabor-sponsored venture capital fund.  Ms. Gualtieriearned her BCL and LLB law degrees at McGill University in 1987 and wasadmitted to the Bar of the Province of Québec in 1988.

 

According to our By-laws, terms of office as director are for one yearor until the next Annual Meeting of the Shareholders and subsequent Meeting ofthe Board of Directors, respectively.

 

There is no family relationship between any of the executiveofficers.  There is no arrangement orunderstanding with any person pursuant to which any director or officerreferred to above was selected as a director or member of seniormanagement.  Officers of the Companyserve at the pleasure of the Board of Directors.

 

**Summary Compensation Table**

 

The following table sets forth all compensationfor services in all capacities to the Company and its subsidiaries for thefiscal years ended December 31, 2007, 2006, and 2005 in respect of each ofthe individuals who were, at December 31, 2007, the Chief ExecutiveOfficer, the Chief Financial Officer, and each of the Company’s three mosthighly compensated executive officers other than the CEO and CFO and whoreceived salary and bonus in excess of $150,000 in the 2007 fiscal year (the“Named Executive Officers”).

 

83

----

 
| ** **                                    | ** ** | ** ** | ** ** | **Annual  Compensation** | ** ** | **Long Term  Compensation**          | ** ** | ** **                              | ** ** |
|-----------------------------------------------|------------|------------|------------|--------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | ** ** | ** ** | **Salary**               | ** ** | **Bonus**                            | ** ** | **Other  Annual  Compen-sation****(1)** | ** ** | **Long Term  Compens-ation  Awards** | ** ** | **LTIP  Payouts** | ** ** | **All Other  Compen-sation** | ** ** |
| **Name &  Principal  Position** | ** ** | **Year**   | ** ** | **Cash  (CDN$)**         | ** ** | **DSU  Election  (****2)****(CDN$)** | ** ** | **Cash  (CDN$)**                        | ** ** | **DSU  Election****(2)****(CDN$)** | ** ** | **(CDN$)** | ** ** | **Securities  Under  Options  Granted  (# of   common  shares)** | ** ** | **(CDN$)** | ** ** | **(CDN$)** | ** ** |
| Martin Barkin, MD (3)                         |       | 2007       |       | 493,750                  |       | nil                                  |       | nil                                     |       | nil |   | 22,889 | (4) | 50,000 |   | nil |   | 480,375 | (5) |
| President & Chief                    |       | 2006       |       | 468,750                  |       | nil                                  |       | 219,633                                 |       | nil |   | 25,053 |   | 50,000 |   | nil |   | 156,873 | (6) |
| Executive Officer                             |       | 2005       |       | 450,000                  |       | nil                                  |       | 91,432                                  |       | nil |   | 23,355 |   | 50,000 |   | nil |   | 1,611,000 | (7) |
|                                          |       |       |       |                     |       |                                 |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Mark Oleksiw                                  |       | 2007       |       | 268,750                  |       | nil                                  |       | nil                                     |       | nil |   | 11,208 |   | 55,000 |   | nil |   | 33,259 | (8) |
| Chief Financial                               |       | 2006       |       | 232,500                  |       | nil                                  |       | 87,150                                  |       | nil |   | 12,391 |   | 25,000 |   | nil |   | nil |   |
| Officer                                       |       | 2005       |       | 225,000                  |       |  nil                            |       | 37,587                                  |       | nil |   | 11,150 |   | 25,000 |   | nil |   | nil |   |
|                                          |       |       |       |                     |       |                                 |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Dan Brazier(9)                                |       | 2007       |       | 365,000                  |       | nil                                  |       | nil                                     |       | nil |   | 14,994 |   | 55,000 |   | nil |   | 139,600 | (10) |
| Chief Operating                               |       | 2006       |       | 320,000                  |       | nil                                  |       | 122,957                                 |       | 100,000 | (11) | 15,694 |   | 25,000 |   | nil |   | nil |   |
| Officer                                       |       | 2005       |       | 290,000                  |       | nil                                  |       | 48,333                                  |       | nil |   | 13,666 |   | 75,000 |   | nil |   | 61,475 | (12) |
|                                          |       |       |       |                     |       |                                 |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Jean-Pierre Robert(13)                        |       | 2007       |       | 341,042                  |       | nil                                  |       | nil                                     |       | nil |   | 13,981 |   | 25,000 |   | nil |   | 29,999 | (14) |
| President, DRAXIS                             |       | 2006       |       | 296,250                  |       | nil                                  |       | 101,929                                 |       | nil |   | 10,409 |   | 25,000 |   | nil |   | nil |   |
| Specialty                                     |       | 2005       | (15)       | 183,606                  |       | nil                                  |       | 45,206                                  |       | nil |   | 594 |   | 100,000 |   | nil |   |  nil |   |
| Pharmaceuticals Inc.                          |       |       |       |                     |       |                                 |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
|                                          |       |       |       |                     |       |                                 |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Alida Gualtieri                               |       | 2007       |       | 230,000                  |       | nil                                  |       | nil                                     |       | nil |   | 9,586 |   | 45,000 |   | nil |   | 102,325 | (16) |
| General Counsel &                    |       | 2006       |       | 197,500                  |       | nil                                  |       | 56,080                                  |       | nil |   | 10,442 |   | 15,000 |   | nil |   | nil |   |
| Secretary                                     |       | 2005       |       | 190,000                  |       | nil                                  |       | 18,236                                  |       | 6,079 |   | 9,627 |   | 15,000 |   | nil |   | nil |   |

----

(1)             Other Annual Compensation”includes payment of insurance premiums and a payment equal to 5% of the NamedExecutive Officers’ base salary from the period of 2007 (for RegisteredRetirement Savings Plan purposes in accordance with the terms of theiremployment with the Company (the “RRSP payment”)). For the period ofJanuary 1st, 2006 to April 30th, 2006, the RRSP payment was equal to5% of the Named Executive Officers’ base salary. For the period fromMay 1st, 2006 to December 31, 2006, the RRSP payment was equal to 4%of the Named Executive Officers’ base salary. For the year 2005, the RRSPpayment equalled 5% of the Named Executive Officers base salary.

 

(2)             Amounts in these columns relateto the portions of salary and bonus elected to be received in the form ofDeferred Share Units (“DSUs”) and are in addition to the cash amounts specified.See “Incentive Plans — Deferred Share Unit Plan”.

 

(3)             Effective December 31,2007, Dr. Barkin resigned as President and Chief Executive Officer as wellas director of the Company. Dr. Barkin is employed as a Special Advisor tothe Board for the period from January 1, 2008 to January 9, 2009 at afixed salary for the term of the employment of CDN$250,000.

 

(4)             This includes club fees of$2,025.

 

(5)             Dr. Barkin realized anaggregate value of $480,375 from the exercise of 225,000 options in 2007. Thisvalue is included in income for tax purposes.

 

(6)             Dr. Barkin realized anaggregate value of $156,873 from the exercise of 130,125 options in 2006. Thisvalue is included in income for tax purposes.

 

(7)             Dr. Barkin realized anaggregate value of $1,291,000 from the exercise of 400,000 options in2005. This value is included in income for tax purposes. In addition, $320,000was paid by the Company in connection with his Retirement CompensationAgreement.

 

(8)             Mr. Oleksiw realized anaggregate value of $33,259 from the exercise of 13,333 options in 2007. Thisvalue is included in income for tax purposes.

 

(9)             Mr. Brazier joined theCompany in August 1998 as President of SpectroPharm Dermatology. InOctober 2005, he was appointed as Chief Operating Officer of the Company,and on January 1, 2008, he was appointed President and Chief ExecutiveOfficer.

 

(10)        Mr. Brazier realized anaggregate value of $139,600 from the exercise of 35,000 options in 2007. Thisvalue is included in income for tax purposes.

 

(11)        Mr. Brazier elected toreceive his 2005 special bonus of an amount of $100,000 in DSUs.

 

(12)        Mr. Brazier realized anaggregate value of $61,475 from the exercise of 15,000 options in 2005. Thisvalue is included in income for tax purposes.

 

(13)        On July 20, 2007, Mr. Robertwas appointed President of DRAXIS Specialty Pharmaceuticals Inc. OnJanuary 1, 2008, Mr. Robert was appointed Chief Operating Officer ofthe Company. He retained his title of President of DRAXIS SpecialtyPharmaceuticals Inc.

 

(14)        Mr. Robert realized anaggregate value of $29,999 from the exercise of 16,666 options in 2007. Thisvalue is included in income for tax purposes.

 

(15)        Mr. Robert joined theCompany as President of DRAXIMAGE, a division of DRAXIS SpecialtyPharmaceuticals Inc., on May 9, 2005.

 

(16)        Ms. Gualtieri realized anaggregate value of $102,325 from the exercise of 25,000 options in 2007. Thisvalue is included in income for tax purposes.

 

84

----

**Incentive Plans**

 

### ***Philosophy***

### ** **

The Company’s philosophy is to link employee compensation to the successof the Company and to emphasize “at risk” employee compensation.

 

The Company has implemented the following plans in an effort to achieve“at risk” employee compensation: Stock Option Plan, Deferred Share Unit Plan,Employee Group Registered Retirement Savings Plan and Non-Executive Long TermIncentive Plan.  The Company does notprovide any form of pension retirement or similar benefits.  The Company does not set aside, accrue ordetermine the amount of its costs that is attributable to senior management.

 

### ***2006Stock Option Plan***

### ** **

Intention and Participant *-*****This plan was approved by the shareholders of the Company on May 18,2006 and the shareholders approved certain amendments to this plan on May 17,2007 to assist and encourage directors, officers and employees of the Companyand its subsidiaries to work towards and participate in the growth anddevelopment of the Company and its subsidiaries by providing such persons withthe opportunity, through stock options, to acquire an ownership interest in theCompany.  A copy of the amended plan isfiled as Exhibit 4.63 to this Annual Report (Form 20-F).

 

Maximum Common SharesIssuable - Theshareholders authorized, at the Company’s annual meeting on May 18, 2006,the issuance of up to 1,500,000 common shares under this plan.  As at March 18, 2008, 655,000 optionshave been granted and are outstanding under this plan, representing 1.6% of theCompany’s issued and outstanding common shares as at March 18, 2008.  As at March 18, 2008, 845,000 commonshares remain reserved for further option grants, representing 2.0% of theCompany’s issued and outstanding common shares as at such date.  The maximum number of common shares that maybe reserved for issuance to insiders pursuant to options granted under the planand any other share compensation arrangement is 10% of the number of commonshares outstanding and the maximum number of common shares that may be issuedto insiders within one year period is 10% of the number of common sharesoutstanding.  The number of sharesreserved for issuance to any one person, including insiders, pursuant tooptions granted in accordance with the plan or otherwise cannot exceed 5% of theoutstanding common shares of the Company.

 

Determination of Number, Price and Term ofOptions - The Board of Directors determines the price per common share, thenumber of options for common shares which may be allotted to each designateddirector, officer or employee, the period in which any option may be exercisedand all the terms and conditions of the option in accordance with theapplicable requirements of any regulatory authority or stock exchange.  The exercise price of common shares subject to anoption will be determined by the Board at the time of grant and will not beless than the market price of the common shares at the Grant Date, calculatedas the closing price of a board lot of the common shares on The Toronto StockExchange on the last trading day immediately preceding the Grant Date or, ifthe common shares did not trade on such last trading day, the average, roundedup to the nearest cent, of the bid and ask prices for a board lot of the commonshares at the close of trading on such last trading day.

 

Dilution Guideline - TheCompany has an established guideline limiting the aggregate number of commonshares that can be issued at any point in time through the exercise of optionsto 13% of the 

 

 

85

----

 

 

Company’soutstanding common shares.  As at March 18,2008, the number of common shares so issuable under the 2006 Stock Option Planand the Stock Option Plan of DRAXIS Health Inc. represented 5.1% of theCompany’s outstanding common shares.

 

Vesting - The periodduring which any option may be exercised is determined by the Board ofDirectors at the time at which the option is granted and shall be no later thanten years from the grant date.

 

Assignability -Options are non-assignable and non-transferable.

 

Terminationof Employment, Permanent Disability or Death of an Option Holder — If an optionholder ceases to hold office as a director, officer or employee of the Companyduring an option period, the exercisable options may be exercised for a periodof thirty days after such option holder ceases to hold such office or positionor for a longer period as the Board of Directors may approve.  In the event of the total and permanentdisability of an option holder, the exercisable options may be exercised for aperiod of six months after the date on which the Board of Directors hasdetermined that the option holder is permanently disabled or for such longerperiod as the Board of Directors may approve. In the event of the death of an option holder, the options that wereexercisable at the date of the death may be exercised by the option holder’sexecutors or personal representatives within six months of the option holder’sdeath or for such longer period as the Board of Directors may approve.

 

Amendment of plan - Exceptas set forth below, the Board of Directors may amend, suspend or terminate the2006 Stock Option Plan at any time in accordance with applicable legislationwithout obtaining the approval of the shareholders.  Any amendment to any provision of the Planwill be subject to any required regulatory or shareholder approval.  The Company is required to obtain theapproval of the shareholders of the Company for any amendment in relation to: (i) themaximum number of shares reserved for issuance under the Plan (and under anyother share compensation arrangements of the Company); (ii) a reduction inthe exercise price for options; (iii) an extension to the term of optionsheld; (iv) the increase in the 10% limits on grants to insider set out in Section 3.04(1) ofthe Plan and any shareholder approval required in respect of an amendment toincrease such limits shall exclude the votes attaching to the common shares, ifany, held by optionholders who are insiders.

 

Grant of Options - In 2007,420,000 options were awarded under the 2006 Stock Option Plan.  Between January 1, 2008 and March 18,2008, 260,000 options were awarded under the 2006 Stock Option Plan.

 

### ***StockOption Plan of DRAXIS Health Inc.***

### ** **

Options Available forFuture Grants**- No additional options are available forissuance under this plan since the 2006 Stock Option Plan was adopted on May 18,2006.

 

Intention and Participants- This plan was approved by shareholders on February 3, 1988 and amendedon June 27, 2001 to permit the Board of Directors to grant options topurchase common shares to directors, officers, employees and arm’s lengthconsultants of the Company and its subsidiaries so as to link corporatecompensation to enhanced shareholder value. Amendments to this plan wereapproved by the shareholders of the Company on May 17, 2007.  A copy of the amended plan is filed as Exhibit 4.64 to this Annual Report (Form 20-F).

 

Maximum Common SharesIssuable - In 2001, the shareholders authorized, at the Company’s annual andspecial meeting, the issuance of up to 7,500,000 common shares under thisplan.  As at March 18, 2008,1,470,828 options have been granted and are outstanding under this plan and thesame number of shares remain reserved for issuance, representing 3.5% of theCompany’s issued and 

 

86

----

 

 

outstanding common shares as at thatdate.  The number of shares reserved forissuance to any one person, including insiders, pursuant to options granted inaccordance with the plan or otherwise cannot exceed 5% of the outstanding commonshares of the Company.  No additionaloptions are available for granting under this Plan since the 2006 Stock OptionPlan was adopted on May 18, 2006.

 

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

 

Dilution Guideline - TheCompany established a guideline limiting the aggregate number of common sharesthat can be issued at any point in time through the exercise of options to 13%of the Company’s outstanding common shares. As at March 18, 2008, thenumber of common shares so issuable was 3.5% of the Company’s outstandingcommon shares.

 

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

 

Assignability - Options arenon-assignable and non-transferable.

 

Termination of Employment,Permanent Disability or Death of an Option Holder — If an option holder ceasesto hold office as a director, officer or employee of the Company during anoption period, the exercisable options may be exercised for a period of thirtydays after such option holder ceases to hold such office or position or for alonger period as the Board of Directorsmay approve.  In the event of the totaland permanent disability of an option holder, the exercisable options may beexercised for a period of six months after the date on which the Board ofDirectors has determined that the option holder is permanently disabled or forsuch longer period as the Board of Directors may approve. In the event of thedeath of an option holder, the options that were exercisable at the date of thedeath may be exercised by the option holder’s executors or personalrepresentatives within six months of the option holder’s death.

 

Amendment of Plan - Exceptas set forth below, the Board of Directors may amend, suspend or terminate theStock Option Plan of DRAXIS Health Inc. at any time, in accordance withapplicable legislation without obtaining the approval of the shareholders.  Any amendment to any provision of the Planwill be subject to any required regulatory or shareholder approval.  The Company is required to obtain theapproval of the shareholders of the Company for any amendment in relation to: (i) themaximum number of shares reserved for issuance under the Plan (and under anyother share compensation arrangements of the Company); (ii) a reduction inthe exercise price for options; and (iii) an extension to the term ofoptions.

 

Aggregate Option Grants toNamed Executive Officers- As of May 18, 2006, no options have been awarded under this Plan and nofurther options shall be awarded under this Plan.

 

 

87

----

 

 

The following table sets forth all of the options of the Company grantedduring the financial year ended December 31, 2007:

 
| **Name**                                                           | ** ** | **Securities    Under   Options Granted  (#)****(1)** | ** ** | **% of  Total   Options Granted   to  Employees in Financial Year** | ** ** | **Exercise  or Base   Price  (CDN$/Security)****(2)** | ** ** | **Market  Value of Securities Underlying Options on the Date of Grant (CDN$/Security)** | ** ** | **Expiration Date**                            |
|--------------------------------------------------------------------|------------|-------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|------------------------------------------------|
| Martin Barkin,  MD President & Chief Executive Officer(3) |       | 50,000                                                |       | 11.9                                                                |       | CDN $5.62                                             |       | CDN $5.62                                                                               |       | December 31,  2011                        |
| Mark Oleksiw  Chief Financial Officer                              |       | 25,000   30,000                                       |       | 13.1                                                                |       | CDN $5.62  CDN $5.93                                  |       | CDN $5.62   CDN $5.93                                                                   |       | December 31,  2011 February 11, 2012 |
| Dan Brazier  Chief Operating Officer(3)                            |       | 25,000   30,000                                       |       | 13.1                                                                |       | CDN $5.62   CDN $5.93                                 |       | CDN $5.62   CDN $5.93                                                                   |       | December 31,  2011 February 11, 2012 |
| Jean-Pierre  Robert President, DSPI(3)                             |       | 25,000                                                |       | 6.0                                                                 |       | CDN $5.62                                             |       | CDN $5.62                                                                               |       | December 31,  2011                        |
| Alida Gualtieri  General Counsel & Secretary              |       | 15,000   30,000                                       |       | 10.7                                                                |       | CDN $5.62   CDN $5.93                                 |       | CDN $5.62  CDN $5.93                                                               |       | December 31,  2011 February 11, 2012 |

----

(1) All of the above options have a three year vesting period withone-third of the options vesting in each of the three years from the date ofgrant. All options were granted in accordance with the 2006 Stock OptionPlan.  The Board allowed Dr. Barkinto keep all issued and outstanding options as at December 31, 2007 totheir normal date of maturity and in accordance with their vesting schedule asset forth in the option grants of said options.

(2) The Exercise Price of the options was determined by the Board ofDirectors in accordance with the provisions of the 2006 Stock Option Plan.

(3) On October 31, 2007, the Company announcedthat Dr. Barkin was resigning as President and CEO of the Companyeffective December 31, 2007.  On January 8,2008, the Company announced that Mr. Dan Brazier was appointed Presidentand CEO and Mr. Jean-Pierre Robert was appointed Chief Operating Officerof the Company effective January 1, 2008.

 

The following table sets forth individual exercises of options by theNamed Executive Officers during the financial year ended December 31, 2007and the financial year-end value of unexercised options:

 
| **Name**                                                             | ** ** | **Securities  Acquired on  Exercise** | ** ** | **Aggregate Value  (CDN$) Realized** | ** ** | **Unexercised Options at  December 31, 2007  (#)  Exercisable/  Unexercisable** | ** ** | **Value of Unexercised in-the-Money Options at December 31, 2007  (CDN$)  Exercisable/  Unexercisable** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|--------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|
| Martin Barkin,  MD   President & Chief   Executive Officer* |       | 225,000                               |       | 480,375                              |       | 100,000 / 50,000                                                                     |       | nil / nil                                                                                                    |       |
| Mark Oleksiw   Chief Financial Officer                               |       | 13,333                                |       | 33,259                               |       | 50,000 / 155,000                                                                     |       | nil / 171,000                                                                                                |       |
| Dan Brazier   Chief Operating Officer                                |       | 35,000                                |       | 139,600                              |       | 150,000 /  205,000                                                                   |       | nil / 171,000                                                                                                |       |
| Jean-Pierre  Robert   President,   DRAXIMAGE division                |       | 16,666                                |       | 29,999                               |       | 25,001 / 108,333                                                                     |       | nil / nil                                                                                                    |       |
| Alida Gualtieri   General Counsel &   Secretary             |       | 25,000                                |       | 102,325                              |       | 30,000 / 45,000                                                                      |       | nil / nil                                                                                                    |       |

----

* On October 31,2007, the Company announced that Dr. Barkin was resigning as President andCEO of the Company effective December 31, 2007.  On January 8, 2008, the Companyannounced that Mr. Dan Brazier was appointed President and CEO and that Mr. Jean-PierreRobert was appointed Chief Operating Officer of the Company effective January 1,2008.

 

88

----

 

 

### ***Deferred ShareUnit Plan***

### ** **

Intention - This Plan was adopted in January 2000 and, in December 2007,the Board of Directors approved certain amendments to this Plan to furtheralign the interests of senior management with those of shareholders byincreasing management shareholdings at minimal cost to the Company. Theamendments were of an administrative nature and to clarify the application ofthe Plan in accordance with Interpretation Bulletin IT-337R4 of Revenue Canada.A copy ofthe amended Deferred Share Unit Plan is filed as Exhibit 4.65.

 

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

 

Participants - Members of senior management of the Company designated bythe Human Resources and Compensation Committee.

 

Redemption of Deferred Share Units - Participants are not entitled to receiveany Deferred Share Units until cessation of employment with the Company for anyreason or their death (the “Redemption Date”). The redemption value of each Deferred Share Unit, redeemable by theparticipant, is the average of the daily high and low board lot trading pricesof the common shares of the Company on the Toronto Stock Exchange or NASDAQStock Exchange on each of the five trading days prior to the RedemptionDate.  The Deferred Share Units must beredeemed no later than the end of the first calendar year commencing after theRedemption Date.

 

Named Executive Officer Elections for 2005, 2006, 2007 and 2008 - Thefollowing table summarizes the elections under this Plan by Named ExecutiveOfficers for the last four fiscal year of the Company:

 
| ** **         | ** ** | **Deferred  Share Unit Elections** | ** ** |
|--------------------|------------|------------------------------------|------------|
| ** **         | ** ** | **2005**                           | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** |
| ** **         | ** ** | **Salary**                         | ** ** | **Bonus** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Salary** | ** ** | **Bonus** | ** ** |
| ** **         | ** ** | **%**                              | ** ** | **$** | ** ** | **%** | ** ** | **$  (CDN)** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** |
| Martin Barkin(1)   |       | nil                                |       | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   |
| Dan Brazier(2)     |       | nil                                |       | nil |   | 67 |   | 100,000 |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   |
| Alida Gualtieri(3) |       | nil                                |       | nil |   | 25 |   | 6,079 |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   |
| Jean-Pierre Robert |       | nil                                |       | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   |
| Mark Oleksiw       |       | nil                                |       | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   | nil |   |

----

(1)                                     As at March 18, 2008, Dr. Barkin had a total of 186,560 Deferred Share Units and the value of hisinterest in this plan at said date was CDN$891,757.

 

(2)                                     As at March 18, 2008, Mr. Brazier had a total of 19,802 Deferred Share Units and the value of hisinterest in this plan at said date was CDN$94,654.

 

 

89

----

 

(3)            As at March 18,2008, Ms. Gualtieri had a total of 1,020 Deferred Share Units and the value of herinterest in this plan at said date was CDN$4,876.

 

### ***EmployeeGroup Registered Retirement Savings Plan***

### ** **

Intention — Toprovide a cost-sharing program for employees of the Company and itssubsidiaries 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 andits subsidiaries are entitled to receive a discretionary payment from theCompany which matches employee contributions on a dollar-for-dollar basistowards an employee’s RRSP, up to a maximum of 5% of the employee’s eligibleincome (“normal” straight time annual earnings or salary, not to includeovertime payments, bonus or any other form of exceptional payment).  The corporate contribution to this planremains under the ownership and control of the employee and is not subject toany lock-in provisions.  The plan isadministered by a committee composed of employees and management.  Subject to the investment choices approved bythe committee, employees control the investment of the contributions of boththe employees and the Company.

 

Participants —Participation is open to all full and part-time permanent Canadian employees ofthe Company and its subsidiaries, other than designated senior managementemployees and the Named Executive Officers.

 

Commencement Date— The plan commenced on January 1, 2002, but employee matchingcontributions were not required until 2006. In 2006 and 2007, matching contributions were required.

 

### ***Non-ExecutiveLong Term Incentive Plan***

### ** **

Intention - Thisplan was approved by the Board of Directors on December 6, 2005.  Its purposes are: (i) to align theinterests of eligible employees with the interests of the shareholders of theCompany; (ii) to attract and retain key employees; and (iii) toensure that key employees’ incentives and rewards are consistent with thestrategic business initiatives of the Company and to achieve divisional andcorporate financial goals to enhance shareholder value.

 

Mechanism — Themaximum plan award for any two-year cycle is established by the Board ofDirectors at the beginning of each cycle and is a percentage of a participant’saverage annual base salary for the cycle. A portion of the maximum plan award is determined based on the Company’scumulative earnings per share (“EPS”) target for the cycle (“Financial Portion”)and a portion of the maximum plan award is determined based on the performanceof the individual participant during the cycle (“Performance Portion”).  The maximum percentage of the plan awardcomprised of the Financial Portion and the maximum percentage of the plan awardcomprised of the Performance Portion are identical for all participants withineach cycle and are established by the Board of Directors.  The portion of the maximum potentialFinancial Portion and the maximum potential Performance Portion that aparticipant will be awarded depends upon the EPS achieved during the cycle andwhether the participant has achieved his or her performance objectives,respectively.  The plan is administeredby the President and Chief Executive Officer of the Company under thesupervision of the Board of Directors. All plan awards are paid in cash within 90 days of the end of acycle.  The first two-year cycle for thisplan terminated on December 31, 2007. There were no payments made in accordance with this plan for said cycle.

 

Participants — Membersof senior management of the Company who are full time employees may be selectedto participate in the plan.  Members ofthe Executive Committee and those senior managers of the Company whoparticipate in an established incentive or participation plan of the Companyare 

 

90

----

 

excluded from participating in this plan.  None of the Named Executive Officers mayparticipate in the plan.

 

**Subsidiary Long-Term Incentive Plans**

** **

### ***DRAXIMAGE, adivision of DRAXIS Specialty Pharmaceuticals Inc.***

### ** **

Intention — To align further the interests of senior management inDRAXIMAGE (formerly DRAXIMAGE Inc.), a division of DRAXIS SpecialtyPharmaceuticals Inc. (“DRAXIMAGE”), for increasing the value of the divisionand therefore enhancing shareholder value of the Company as a whole.

 

Mechanism — The terms of this plan provide that, subject to theachievement of certain conditions, the Company will make payments to planparticipants in the form of cash based on the increase in the fair market valueof DRAXIMAGE as of the date of the onset of the Plan and the date oftermination of the Plan.

 

Participants — Selected members of senior management of DRAXIMAGE asdesignated by the Company.  Mr. Jean-PierreRobert participates in this plan but received no award under the plan in 2007.

 

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

### ** **

Intention — In September 2003, thethen-existing Equity Participation Plan of DRAXIS Pharma Inc. (as of January 1,2005 known as DRAXIS Pharma, a division of DRAXIS Specialty PharmaceuticalsInc.) was terminated and replaced with a Long Term Equity Incentive Plan toprovide certain senior management employees of DRAXIS Pharma with a meaningfulincentive to increase the value of the Company and to allow management to sharein the benefits of that value creation.

 

Mechanism**— The terms of this plan provide that eligible participantshave a right to receive the cash value of phantom equity shares of DRAXISPharma on the plan expiry date or other designated termination event.  In order for an eligible participant toreceive a termination distribution amount with respect to this plan, certainfinancial ratios must be met by DRAXIS Pharma.

 

Participants — Selected members of senior management of DRAXIS Pharma asdesignated by the Company.  The Companymade no payments under this plan to the Named Executive Officers in 2007 butpayments were made in 2007 to two participants who are not Named ExecutiveOfficers.

 

**Compensation of Directors**

** **

The compensation of the Board of Directors has not changed since January 1,2005 at which time the Company used a third-party survey related to Boardcompensation in Canada to determine what payments should be made to the Boardof Directors.  Directors who are employeesof the Company do not receive any compensation in their capacity as directors.During the 2007 year, each director, other than Dr. Martin Barkin* andthe Chairman, received an annual honorarium of CDN$17,500 plus a meeting fee ofCDN$1,500 for each Board of Directors and Committee meeting attended, includingthe meetings attended via teleconference. Related travel and out-of-pocket expenses to attend Board and Committeemeetings were also reimbursed to each director. The members of the Special Committee created in May 2006 receivedcompensation of CDN$1,500 for each meeting they attended, including themeetings attended via teleconference and each received a retainer fee ofCDN$10,000 (CDN$15,000 for the 

 
|                                                                                    |   |
|-----------------------------------------------------------------------------------------|--------|
| * Dr. Martin Barkin resigned as a director  effective December 31, 2007. |

 

 

91

----

 

Chairman).** **In addition, the Chairs of each of the Human Resources and CompensationCommittee and the Nominating and Corporate Governance Committee received anannual retainer of CDN$5,000.  TheChairman of the Audit Committee received an annual retainer of CDN$10,000.  For the year ended December 31, 2007, inaddition to the retainer of CDN$5,000 received as Chairman of the HumanResources and Compensation Committee, Mr. Brian King received CDN$95,000as non-executive Chairman of the Board of Directors, CDN$15,000 as the Chairmanfor the Special Committee and CDN$12,000 for attending meetings of the SpecialCommittee.  He did not otherwise receivemeeting fees as a director.

 

The following table sets forth the total compensation paid in Canadiandollars to each director in the year ended December 31, 2007.  Martin Barkin, as an employee of the Company,did not receive any compensation in his capacity as a director.

 
| ** **              | ** **   | **Leslie Dan**      | ** **   | **George   Darnell (1,2)** | ** **   | **Rolf Henel (1,2)** | ** **   | **Brian King (3,4,5)** | ** **   | **Sam Sarick (1,4)** | ** **   | **Bruce   Simpson   (1,3,4)** | ** **   | **John Vivash (2,3,4)** | ** **   |
|-------------------------|--------------|---------------------|--------------|----------------------------|--------------|----------------------|--------------|------------------------|--------------|----------------------|--------------|-------------------------------|--------------|-------------------------|--------------|
| **Annual  Retainer**    |         | $ 17,500       |         | $17,500                    |         | $17,500              |         | $95,000                |         | $17,500              |         | $17,500                       |         | $17,500                 |         |
| **Chairman  Retainer**  |         | —              |         | —                     |         | —               |         | $5,000                 |         | $10,000              |         | —                        |         | $5,000                  |         |
| **Committee  Retainer** |         | —              |         | $5,000                     |         | $5,000               |         | $15,000                |         | $15,000              |         | $7,500                        |         | $10,000                 |         |
| **Committee  meetings** |         | —              |         | $15,00                     |         | $15,000              |         | $12,000                |         | $16,500              |         | $24,000                       |         | $30,000                 |         |
| **Board  meetings**     |         | $ 16,500       |         | $16,500                    |         | $16,500              |         | —                 |         | $16,500              |         | $18,000                       |         | $18,000                 |         |
| **TOTAL**               | *** *** | ***$ 34,000*** | *** *** | ***$54,000***              | *** *** | ***$54,000***        | *** *** | ***$127,000***         | *** *** | ***$75,500***        | *** *** | ***$67,000***                 | *** *** | ***$80,500***           | *** *** |
| **Options**             |         | 15,000              |         | 15,000                     |         | 15,000               |         | 20,000                 |         | 15,000               |         | 15,000                        |         | 15,000                  |         |

----

| (1) |   | Member of the  Audit Committee.                                                                                                                                  |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Member of the  Nominating and Corporate Governance Committee.                                                                                                    |
| (3) |   | Member of the  Human Resources and Compensation Committee.                                                                                                       |
| (4) |   | Member of the  Special Committee created in May 2006. Mr. Bruce Simpson became a  member of this Committee on October 31, 2007.                   |
| (5) |   | Mr. Brian  King will not be seeking re-election as a director and a substitute member  will have to be elected for each Committee in which he participated. |

 

 

Each of the directors (excluding the President andChief Executive Officer) is awarded 15,000 options as partial compensation forservices rendered as directors each January 1st.  The Chairman is awarded an additional 5,000options.  All options are granted at theclosing price of the common shares on the TSX for the trading day immediatelypreceding their grant date.

 

From time to time, special committees of the Board of Directors, such asthe Special Committee constituted in May 2006, are appointed to considerspecial issues.  Compensation for work onsuch committees is set based on the amount of work involved.

 

**Minimum Shareholding Requirements**

 

In June 2001, the Board ofDirectors established a corporate policy requiring each then current Directorto acquire by June 2004 (or in the case of future Board of Directorsmembers, within three years of their appointment) common shares in the Companyequal to five times his or her annual honorarium.  All directors who were to comply with thisrequirement by June 2004 were in compliance as of said date.  In February 2005, the Board of Directorsadopted a resolution amending this policy to fix the number of common shares tobe so held at 15,000.  Compliance withthis policy is monitored annually by the Nominating and Corporate GovernanceCommittee.  As at December 31, 2007and March 18, 2008, all directors were compliant with this policy.

 

92

----

 

Director shareholdings as of March 18, 2008

 

| **Director**     | ** ** | **Shares Owned** | ** ** | **% Owned of total issued and** | ** ** |
|------------------|------------|------------------|------------|---------------------------------|------------|
| ** **       | ** ** | ** **       | ** ** | **outstanding common shares**   | ** ** |
| Leslie Dan       |       | 104,056          |       | < 1                          |       |
| George Darnell   |       | 80,475           |       | < 1                          |       |
| Rolf H. Henel    |       | 36,000           |       | < 1                          |       |
| Brian King*      |       | 165,750          |       | < 1                          |       |
| Sam Sarick       |       | 836,124          |       | 2.0                             |       |
| Bruce W. Simpson |       | 40,000           |       | < 1                          |       |
| John Vivash      |       | 25,000           |       | < 1                          |       |
| Total            |       | 1,287,405        |       | 3.1                             |       |

----

* Mr. BrianKing will not seek re-election as a director at our next annual shareholdersmeeting.

 

Senior Managementshareholdings as of March 18, 2008

 

| **Senior Management** | ** ** | **Shares Owned** | ** ** | **% Owned of total issued and** | ** ** |
|-----------------------|------------|------------------|------------|---------------------------------|------------|
| ** **            | ** ** | ** **       | ** ** | **outstanding common shares**   | ** ** |
| Dan Brazier(1)        |       | 9,355            |       | < 1                          |       |
| Jean-Pierre Robert    |       | 0                |       | nil                             |       |
| Alida Gualtieri(2)    |       | 500              |       | < 1                          |       |
| Chien Huang(3)        |       | 0                |       | nil                             |       |
| Mark Oleksiw          |       | 3,000            |       | < 1                          |       |
| Jerry Ormiston(4)     |       | 29,100           |       | < 1                          |       |
| Total                 |       | 41,955           |       | < 1                          |       |

----

(1)**                                    **In addition, as at March 18, 2008, Mr. Brazierowns 19,802 Deferred Share Units and the value of his interest in this plan atsaid date was CDN$94,654.

(2)**                                    **In addition, as at March 18, 2008, Ms. Gualtieriowns 1,020 Deferred Share Units and the value of her interest in this plan atsaid date was CDN$4,876.

(3)                                     In addition, as at March 18, 2008, Mr. Huangowns 16,249 Deferred Share Units and the value of his interest in this plan atsaid date was CDN$77,670.

(4)**                                    **In addition, as at March 18, 2008, Mr. Ormistonowns 6,387 Deferred Share Units and the value of his interest in this plan atsaid date was CDN$30,530.

 

93

----

 

Director outstanding options as of March 18, 2008

 

| **Director**       | ** ** | **# of Options for** | ** ** | **Exercise Price** | ** ** | **Expiration Date**     | ** ** |
|--------------------|------------|----------------------|------------|--------------------|------------|-------------------------|------------|
| ** **         | ** ** | **common shares**    | ** ** | ** **         | ** ** | ** **              | ** ** |
| Leslie L. Dan      |       | 15,000               |       | CDN$4.30           |       | December 31,  2008 |       |
|               |       | 15,000               |       | CDN$5.73           |       | December 31,  2009 |       |
|               |       | 15,000               |       | CDN$5.05           |       | December 31,  2010 |       |
|               |       | 15,000               |       | CDN$5.62           |       | December 31,  2011 |       |
|               |       | 15,000               |       | CDN$4.07           |       | December 31,  2012 |       |
| George M.  Darnell |       | 15,000               |       | CDN$4.30           |       | December 31,  2008 |       |
|               |       | 15,000               |       | CDN$5.73           |       | December 31,  2009 |       |
|               |       | 15,000               |       | CDN$5.05           |       | December 31,  2010 |       |
|               |       | 15,000               |       | CDN$5.62           |       | December 31,  2011 |       |
|               |       | 15,000               |       | CDN$4.07           |       | December 31,  2012 |       |
| Rolf H. Henel      |       | 15,000               |       | CDN$4.30           |       | December 31,  2008 |       |
|               |       | 15,000               |       | CDN$5.73           |       | December 31,  2009 |       |
|               |       | 15,000               |       | CDN$5.05           |       | December 31,  2010 |       |
|               |       | 15,000               |       | CDN$5.62           |       | December 31,  2011 |       |
|               |       | 15,000               |       | CDN$4.07           |       | December 31,  2012 |       |
| Brian M. King*     |       | 20,000               |       | CDN$4.30           |       | December 31,  2008 |       |
|               |       | 20,000               |       | CDN$5.73           |       | December 31,  2009 |       |
|               |       | 20,000               |       | CDN$5.05           |       | December 31,  2010 |       |
|               |       | 20,000               |       | CDN$5.62           |       | December 31,  2011 |       |
|               |       | 20,000               |       | CDN$4.07           |       | December 31,  2012 |       |
| Samuel Sarick      |       | 15,000               |       | CDN$4.30           |       | December 31,  2008 |       |
|               |       | 15,000               |       | CDN$5.73           |       | December 31,  2009 |       |
|               |       | 15,000               |       | CDN$5.05           |       | December 31,  2010 |       |
|               |       | 15,000               |       | CDN$5.62           |       | December 31,  2011 |       |
|               |       | 15,000               |       | CDN$4.07           |       | December 31,  2012 |       |
| Bruce W. Simpson   |       | 15,000               |       | CDN$4.30           |       | December 31,  2008 |       |
|               |       | 15,000               |       | CDN$5.73           |       | December 31,  2009 |       |
|               |       | 15,000               |       | CDN$5.05           |       | December 31,  2010 |       |
|               |       | 15,000               |       | CDN$5.62           |       | December 31,  2011 |       |
|               |       | 15,000               |       | CDN$4.07           |       | December 31,  2012 |       |
| John A. Vivash     |       | 15,000               |       | CDN$4.30           |       | December 31,  2008 |       |
|               |       | 15,000               |       | CDN$5.73           |       | December 31,  2009 |       |
|               |       | 15,000               |       | CDN$5.05           |       | December 31,  2010 |       |
|               |       | 15,000               |       | CDN$5.62           |       | December 31,  2011 |       |
|               |       | 15,000               |       | CDN$4.07           |       | December 31,  2012 |       |
| **Total**          | ** ** | **550,000**          | ** ** | ** **         | ** ** | ** **              | ** ** |

----

* Mr. BrianKing will not seek re-election as a director at our next annual shareholdersmeeting.

 

94

----

 

Senior Managementoutstanding options as of March 18,2008

** **

| **Senior Management** | ** ** | **# of Options for** | ** ** | **Exercise Price** | ** ** | **Expiration Date**     | ** ** |
|-----------------------|------------|----------------------|------------|--------------------|------------|-------------------------|------------|
| ** **            | ** ** | **common shares**    | ** ** | ** **         | ** ** | ** **              | ** ** |
| Dan Brazier           |       | 100,000              |       | CDN$2.36           |       | July 14,  2013     |       |
|                  |       | 100,000              |       | CDN$4.70           |       | August 10,  2009   |       |
|                  |       | 25,000               |       | CDN$5.73           |       | December 31,  2009 |       |
|                  |       | 50,000               |       | CND$5.38           |       | October 2,  2015   |       |
|                  |       | 25,000               |       | CDN$5.05           |       | December 31,  2010 |       |
|                  |       | 25,000               |       | CDN$5.62           |       | December 31,  2011 |       |
|                  |       | 30,000               |       | CDN$5.93           |       | February 11,  2012 |       |
|                  |       | 50,000               |       | CDN$4.07           |       | December 31, 2012  |       |
| Jean-Pierre Robert    |       | 16,667               |       | CDN$6.05           |       | May 10,  2010      |       |
|                  |       | 75,000               |       | CDN$6.05           |       | May 10,  2015      |       |
|                  |       | 16,667               |       | CDN$5.05           |       | December 31,  2010 |       |
|                  |       | 25,000               |       | CDN$5.62           |       | December 31,  2011 |       |
|                  |       | 35,000               |       | CDN$4.07           |       | December 31,  2012 |       |
| Alida Gualtieri       |       | 15,000               |       | CDN$5.73           |       | December 31,  2009 |       |
|                  |       | 15,000               |       | CDN$5.05           |       | December 31,  2010 |       |
|                  |       | 15,000               |       | CDN$5.62           |       | December 31,  2011 |       |
|                  |       | 30,000               |       | CDN$5.93           |       | February 11,  2012 |       |
|                  |       | 25,000               |       | CDN$4.07           |       | December 31,  2012 |       |
| Chien Huang           |       | 50,000               |       | CDN$2.36           |       | July 14,  2013     |       |
|                  |       | 15,000               |       | CDN$5.73           |       | December 31,  2009 |       |
|                  |       | 15,000               |       | CDN$5.05           |       | December 31,  2010 |       |
|                  |       | 15,000               |       | CDN$5.62           |       | December 31,  2011 |       |
| Mark Oleksiw          |       | 100,000              |       | CDN$2.36           |       | July 14,  2013     |       |
|                  |       | 25,000               |       | CDN$5.73           |       | December 31,  2009 |       |
|                  |       | 25,000               |       | CDN$5.05           |       | December 31,  2010 |       |
|                  |       | 25,000               |       | CDN$5.62           |       | December 31,  2011 |       |
|                  |       | 30,000               |       | CDN$5.93           |       | February 11,  2012 |       |
|                  |       | 25,000               |       | CDN$4.07           |       | December 31,  2012 |       |
| Jerry Ormiston        |       | 15,000               |       | CDN$5.73           |       | December 31,  2009 |       |
|                  |       | 15,000               |       | CDN$5.05           |       | December 31,  2010 |       |
|                  |       | 15,000               |       | CDN$5.62           |       | December 31,  2011 |       |
|                  |       | 15,000               |       | CDN$4.07           |       | December 31,  2012 |       |
| **Total**             | ** ** | **1,058,334**        | ** ** | ** **         | ** ** | ** **              | ** ** |

 

**Board Practices**

 

Statement of Corporate Governance Practices

 

The Board of Directors of the Company believes that sound corporategovernance practices are essential to the well-being of the Company and itsshareholders, and that these practices should be reviewed regularly to ensurethat they are appropriate.  Effective June 30, 2005, National Instrument 58-101 *Disclosure of Corporate Governance Practices*(“NI 58-101”) and National Policy 58-201 *CorporateGovernance Guidelines* (“NP 58-201”) were adopted inCanada.  NI 58-101 requires issuersto disclose the corporate governance practices that they have adopted.  NP 58-201 provides guidance on corporategovernance practices.  In addition, theCompany is subject to Multilateral Instrument 52-110 *Audit Committees* (“MI 52-110”), which has been adoptedin various Canadian provinces and territories and which prescribes certainrequirements in relation to audit committees. The Board ofDirectors has 

 

95

----

 

carefully considered and reviewed the series ofguidelines for effective corporate governance in NP 58-201, the corporategovernance requirements of the U.S. *Sarbanes-OxleyAct of 2002*(the “SOX Requirements”), and the corporate governancereforms of The NASDAQ Stock Market, Inc. (the “NASDAQ Rules”).  The Board of Directors believes that theCompany’s corporate governance practices satisfy the recommendations and rules containedin these various regulations.  TheCompany’s policies and practices for corporate governance are set out below.

 

Mandateof the Board of Directors

 

The mandate of the Board of Directors is tosupervise the management of the business and affairs of the Company.  In light of that responsibility, the Board ofDirectors reviews, discusses and approves various matters related to theCompany’s operations, strategic direction and organizational structure, whererequired, and involves itself jointly with management in ensuring the creationof shareholder value and in serving the best interests of the Company.  In April 2004, the Board of Directorsadopted a detailed Charter.  The Charteris available on the Company’s website at www.draxis.com.  The Charter specifies that the Board ofDirectors is responsible for:

 
| (i)    |   | Adopting a strategic planning  process for the Company;                                                                                                                                        |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                           |
| (ii)   |   | Adopting a  communications policy for the Company;                                                                                                                                             |
|   |   |                                                                                                                                                                                           |
| (iii)  |   | Overseeing the  financial integrity of the Company;                                                                                                                                            |
|   |   |                                                                                                                                                                                           |
| (iv)   |   | Monitoring compliance  with the corporate objectives of the Company;                                                                                                                           |
|   |   |                                                                                                                                                                                           |
| (v)    |   | Approving and  ascertaining that the Company monitors adherence to its Code of Ethics and  Business Conduct;                                                                                   |
|   |   |                                                                                                                                                                                           |
| (vi)   |   | Appointing the Chief  Executive Officer (the “CEO”), monitoring his performance and ascertaining  that succession plans are in place with respect to the CEO and senior  management; |
|   |   |                                                                                                                                                                                           |
| (vii)  |   | Ensuring that  appropriate structures and procedures are in place so that the Board of  Directors can function independently from management;                                                  |
|   |   |                                                                                                                                                                                           |
| (viii) |   | Establishing  performance measures for the Company and its management;                                                                                                                         |
|   |   |                                                                                                                                                                                           |
| (ix)   |   | Monitoring compliance  with legal requirements and ascertaining that the Company has procedures  concerning the proper preparation, approval and maintenance of documents and  records;        |
|   |   |                                                                                                                                                                                           |
| (x)    |   | Approving changes in  the By-laws and Articles of Incorporation and agendas for shareholder  meetings;                                                                                         |
|   |   |                                                                                                                                                                                           |
| (xi)   |   | Approving the Company’s  legal structure, name and logo; and                                                                                                                              |
|   |   |                                                                                                                                                                                           |
| (xii)  |   | Performing such  functions as it reserves to itself or which cannot, by law, be delegated to  Committees of the Board of Directors or to management.                                           |

 

There are no service contracts with the Board members that provide forany benefits upon their termination as directors of the Company.

 

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

 

There were twelve meetings of the Board of Directors in 2007.

 

96

----

 

Position Descriptions

 

In April 2004,the Company adopted terms of reference for each of the Non Executive Chair ofthe Board of Directors (the “Chair of the Board”), the Committee Chairs and theCEO setting out the key responsibilities of each of these individuals.  The terms of reference for each of the CEOand Chair of the Board of Directors were modified and adopted by the Board on May 17,2007.

 

Theterms of reference for each of the Chair of the Board and the Committee Chairsprovide that each of these individuals is to be an independent director, hasunfettered two-way communication with all senior officers and reports to andmaintains open communication with the CEO. In addition, the terms of reference also provide that the Chair of the AuditCommittee has unfettered two-way communication with the independent auditors ofthe Company.  The primary role of theChair of the Board and of the Committee Chairs includes ensuring that the Boardof Directors or the relevant Committee, as the case may be, functions properly,that it meets its obligations and responsibilities, and that its organizationand mechanisms are in place and are working effectively. A copy of theamended terms of reference of the Non Executive Chair is filed as Exhibit 4.66.  The terms of reference of the CommitteeChairs were filed on SEDAR (www.sedar.com) on March 30, 2007.

 

Theterms of reference for the CEO provide that the CEO reports to and maintainsopen communication with the Chair of the Board. The terms of reference for the CEO provide that the CEO is to provideoverall leadership and vision in developing, in concert with the Board ofDirectors, the strategic direction of the Company, and in developing thestrategies and business plans necessary to realise corporate objectives.  They also provide that it is the CEO’sresponsibility to manage the overall business of the Company to ensurestrategic and business plans are effectively implemented, the results aremonitored and reported to the Board of Directors, and financial and operationalobjectives are attained.  A copy of theamended terms of reference for the CEO is filed as Exhibit 4.67 tothis Annual Report (Form 20-F).

 

Composition of the Board ofDirectors

 

The Board of Directors has reviewed its composition to determine whichof the nominee directors may be considered “independent” in conformity withapplicable Canadian, TSX, U.S. and NASDAQ requirements.  Generally, a director who does not have anydirect or indirect “material relationship” with the Company is consideredindependent.  A “material relationship”is a relationship which could, in the view of the Board of Directors, bereasonably expected to interfere with the exercise of a member’s independentjudgment.

 

TheBoard of Directors, to be composed of seven members, has considered therelationship of each of the nominee directors and has determined that five ofthe seven nominee directors are considered to be independent.  Messrs. Darnell, Henel, Sarick, Simpsonand Vivash are considered to be independent directors.  Mr. Brazier is not considered to be anindependent director because he is the President and Chief Executive Officer ofthe Company. Mr. Dan is not considered to be an independent directorbecause he was an executive officer of Viventia Biotech Inc. at a time when Dr. MartinBarkin, former President and CEO and Director of the Company, was a member ofthe Compensation Committee of that company. Dr. Barkin was a director of the Company from May 19, 1992until December 31, 2007.  Inaccordance with the provisions of Multilateral Instrument 52-110, Mr. Danwill be deemed to be a non-independent director until December 30, 2008.

 

The Board of Directors believes that during his tenure Dr. Barkin,who resigned as a director of the Board of Directors as of December 31,2007, was sensitive to conflicts of interest. He recused himself from deliberations and voting in connection with allmatters related to his employment compensation. In 

 

97

----

 

addition, when it determines that it would beappropriate to do so, the Board of Directors sets aside, during its regularlyscheduled meetings, time for meeting without any members of management(including the CEO) or any non-independent directors present. During the 2007year, five meetings were so held.

 

The Board of Directors has adopted a practice that the Chairman of theBoard of Directors and the CEO of the Company are separate individuals.  Mr. Brian King*, the Chairman of theBoard of Directors, is an independent director. The Chairman provides leadership to the Board of Directors with respectto its functions as described in the Board of Directors’ mandate and overseesthe logistics of the operations of the Board of Directors.  As Mr. Brian King is not seekingre-election, the directors will elect a new Chairman following the Meeting ofthe shareholders.
|                                                                                                   |   |
|--------------------------------------------------------------------------------------------------------|--------|
| * Mr. King will  not seek re-election as a director at our next annual shareholders meeting. |

 

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

 

Our by-laws provide that the members of the Board of Directors areelected to a renewable one year term. All of our current members of the Board of Directors and AuditCommittee, Nominating and Corporate Governance Committee and Human Resourcesand Compensation Committee were elected or ratified at a shareholder’s meetingheld in May 2007.

 

Committees of the Board ofDirectors

 

The Board of Directors has three standing committees:  the Audit Committee, the Human Resources andCompensation Committee and the Nominating and Corporate GovernanceCommittee.  To maintain appropriateindependence, no members of management sit on any of the three standingcommittees.

 

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

 

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

 

*Audit Committee*

 

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

 

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

 

In reviewing the audited financial statements of the Company, theCommittee discusses the quality, not just the acceptability, of the accountingprinciples, the reasonableness of significant judgments, and the clarity ofdisclosure in the financial statements. In addition, the Committee discusses with the Company’s Independent RegisteredChartered Accountants the overall scope and plans for their 

 

98

----

 

audit. The Committee meets with the Independent Registered CharteredAccountants, with and without management present, to discuss the results of theirexamination and the overall quality of the Company’s financial reporting.  The Committee also carefully reviews evolvingCanadian and U.S. audit committee regulations and best practices to ensurecorporate alignment with the spirit and intent of such regulations andpractices.

 

In February 2007, May 2005, February 2005 and April 2004,the Board of Directors approved amendments to the Charter for the Audit Committee,which was initially approved in February 2003.  The Charter is available on the Company’swebsite at www.draxis.com and was filed onSEDAR (www.sedar.com) on March 30,2007.  The Charter specifies that the purpose of theCommittee is to assist the Board of Directors with its oversightresponsibilities by:

 

·                  Reviewing the integrity of theconsolidated financial statements of the Company;

·                  Recommending to the Board of Directorsthe appointment of the Independent Registered Chartered Accountants andreviewing the Independent Registered Chartered Accountants’ qualifications andindependence;

·                  Reviewing the performance of theCompany’s Independent Registered Chartered Accountants;

·                  Reviewing the timely compliance by theCompany with all legal and regulatory requirements for audit and relatedfinancial functions of the Company;

·                  Reviewing financial information containedin public filings of the Company prior to filing;

·                  Reviewing earnings announcements of theCompany prior to release to the public and any other press release containingfinancial information;

·                  Overseeing the Company’s systems of andcompliance with internal financial controls and management’s reporting oninternal controls and risk management;

·                  Reviewing the Company’s auditing, accountingand financial reporting processes; and

·                  Dealing with all complaints regardingaccounting controls and auditing matters.

 

In accordance with the Audit Committee Charter, the Audit Committeepre-approves all auditing services and permitted non-audit services (includingfees and terms thereof) to be performed for the Company or its subsidiaries byits Independent Registered Chartered Accountants.

 

In May 2003, the Audit Committee also established “whistleblowing”procedures for the confidential submission of concerns by employees of theCompany or any of its subsidiaries about accounting, internal controls orauditing issues.  The Company providesthe employees with reminders of the existence of such procedures on an annualbasis.

 

Composition of the Audit Committee

 

TheCommittee is currently composed of four directors, all of whom are independentdirectors, as independence is defined under Rule 10A-3 of the *Exchange Act*, as amended, and all of whomare financially literate.  The members ofthe Audit Committee are Messrs. Samuel Sarick (Chairman), Bruce Simpson,George Darnell and Rolf Henel.  Mr. Henelis the Company’s designated financial expert in accordance with applicableregulatory and legislative requirements. The designation of Mr. Henel as an Audit Committee financial expertdoes not make Mr. Henel an “expert” for any other purpose, impose anyduties, obligations or liability on Mr. Henel that are greater than thoseimposed on members of the Audit Committee and Board of Directors who do not carryhis designation, or affect the duties, obligations or liability of any othermember of the Audit Committee.

 

99

----

 

Relevant Education and Experience

 

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

 

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

 

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

 

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

 

Mr. George Darnell has an MBA degree and is the retired Presidentof the Dade Division and Executive Vice President of the Baxter DiagnosticsGroup of Baxter International.

 

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

 

*Human Resources and Compensation Committee*

 

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

 

Each of the three current members of the Committee is an independentdirector.  The members of the HumanResources and Compensation Committee are Messrs. Brian King (Chairman)*,Bruce Simpson and John Vivash.
|                                                                                                         |   |
|--------------------------------------------------------------------------------------------------------------|--------|
| * Mr. Brian King  will not seek re-election as a director at our next annual shareholders meeting. |

 

In May 2005,the Board of Directors approved amendments to the Charter for the HumanResources and Compensation Committee, which was initially approved in April 2004.  The Charter is available on the Company’swebsite at www.draxis.com.  The Charterspecifies that the purpose of the Committee is to assist the Board of Directorswith its oversight responsibilities by reviewing and reporting on:

 

·                  Management’s succession plans forexecutive officers, with special emphasis on CEO succession, and includingspecific development plans and career planning for potential successors;

·                  Compensation philosophy of theorganization, including a compensation strategy and compensation policies forexecutive officers, as proposed by the CEO;

·                  Recommendations to the Board of Directorsfor the appointment of the CEO and other executive officers, corporateobjectives that the CEO and such other executive officers, as the case may be, 

 

100

----

 

are responsiblefor meeting, assessment of the CEO against these objectives, monitoring of theCEO’s performance, and providing advice and counsel in the execution of hisduties;

·                  Total compensation plans includingadequacy and form of compensation realistically reflecting the responsibilitiesand risks of the position for the CEO of the Company and, in connectiontherewith, consider appropriate information, including information from theBoard of Directors with respect to the overall performance of the CEO;

·                  Compensation for executive officers,annual adjustment to executive officer salaries, and the design andadministration of short and long-term incentive plans, stock options, benefitsand perquisites as proposed by the CEO;

·                  Employment and termination arrangementsfor executive officers;

·                  Adoption of new or significantmodifications to pay and benefit plans;

·                  Significant changes to the Company’sorganizational structure relating to human resources function;

·                  The Committee’s proposed executivecompensation report to be contained in the Company’s annual Management ProxyCircular;

·                  Management development programs for theCompany;

·                  Any special employment contracts orarrangements with executive officers of the Company including any contractsrelating to a change of control;

·                  Remuneration for members of the Board ofDirectors and Committees thereof, including adequacy and form of compensationrealistically reflecting the responsibilities and risks of the positions andrecommending changes where applicable;

·                  Compliance by the Company and itssubsidiaries with all applicable employment and labor legislation; and

·                  The performance of the Committee and theeffectiveness of the Committee’s members.

 

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

 

*Nominating and Corporate Governance Committee*

 

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

 

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

 

In May 2005, the Board of Directors approvedamendments to the Charter for the Nominating and Corporate GovernanceCommittee, which was initially approved in April 2004.  The Charter is available on the Company’swebsite at www.draxis.com.  The Charterspecifies that the purpose of the Committee is to assist the Board of Directorswith its oversight responsibilities by:

 

·                  Establishing a policy and procedure for identifyingand selecting potential nominees for the Board of Directors, includingconsidering the competencies and skills that the Board of Directors shouldpossess and the competencies and skills of each existing and potentialdirector;

 

101

----

 

·                  Monitoring Board of Directors size andcomposition and suggesting changes in this respect where appropriate;

·                  Recommending annually members forelection to the Board of Directors;

·                  Identifying and recommending newcandidates for Board of Directors membership;

·                  Developing the Company’s approach togovernance issues and making recommendations to the Board of Directors in thearea of corporate governance practices of the Board of Directors;

·                  Preparing and reviewing with the Board ofDirectors an annual performance evaluation of the effectiveness of individualBoard members and the Board of Directors and its Committees.  The assessment of the Board of Directorsexamines its effectiveness as a whole and specifically reviews areas that theBoard of Directors and/or management believe could be improved to ensure thecontinued effectiveness of the Board of Directors in the execution of itsresponsibilities;

·                  Developing and recommending to the Boardof Directors standards to be applied to assess material relationships betweenthe Company and its Directors in accordance with conflict of intereststandards;

·                  Reviewing annually the risks identifiedby the Audit Committee with respect to the risk management policies andprocedures of the Company and to ensure such risks are appropriately identifiedin the Company’s public disclosure documentation;

·                  Revising, as appropriate, in accordancewith best practices and legal requirements, the Code of Ethics and BusinessConduct for directors, officers and employees, as well as the Disclosure andInsider Trading Policy for the Company to address, among other things,procedures to monitor insider trading activities, to prevent selectivedisclosure and to mandate trading blackouts and corporate quiet periods;

·                  Monitoring compliance with any Board ofDirectors mandated Director minimum shareholding requirements and monitoringattendance by Directors at Board of Directors and Committee meetings;

·                  Reviewing the Charter periodically andrecommending any changes required to its scope and content to the Board ofDirectors; and

·                  Carrying out any other duties orresponsibilities expressly delegated to the Committee by the Board ofDirectors.

 

*Special Committee*

 

As stated above, from time to time, special committeesof the Board of Directors are appointed to consider special issues.  On May 10, 2006, the Board constituted aSpecial Committee currently comprised of Mr. Brian King*, Mr. SamSarick, Mr. John Vivash and Mr. Bruce Simpson, who became a member onOctober 31, 2007, each an independent director, in order to determine thelong term strategy of the Company and the opportunities available to it and itssubsidiaries for long term growth.

----

* Mr. Brian King will not seek re-electionas a director at our next annual shareholders meeting.

 

Decisions Requiring Approvalby the Board of Directors

 

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

 

(i)                                     the approval of the quarterly and annualfinancial statements and earnings announcements;

(ii)                                  the approval of management’s discussionand analysis of financial results;

(iii)                               the approval of the Company’s strategicbusiness plans and directions;

 

102

----

 

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

(v)                                 any disposition or expenditure in excessof CDN$1,000,000.

 

Orientation of New Directorsand Continuing Education

 

In orienting new members to the Board of Directors,members are provided with an opportunity to visit the Company’s facilities andto meet with management and other members of the Board of Directors to discussand understand the Company’s business.  With respect to continuingeducation of the directors, detailed documentation and presentations areregularly provided to directors relating to the current business plan andcurrent policies of the Company as well as ongoing developments in the industryareas in which the Company operates as well as legislative changes affectingthe Company.  All of the Company’sexecutives are available for discussions with directors concerning anyquestions or comments which may arise between meetings.

 

Performance of the Board ofDirectors

 

The Board of Directors regularly considersand assesses its performance relating to its effectiveness, size, compensationpolicies and assessment of management performance.  In this regard, in December 2007, thedirectors completed a Board Effectiveness Survey prepared by the Nominating andCorporate Governance Committee in which they gave assessments on issues relatedto Board of Directors responsibility, operations and effectiveness.  The results of this survey were forwarded tothe Chairman of the Nominating and Corporate Governance Committee, who sharedthe results with all of the Board members. In December 2007, directors also completed a Board EvaluationSurvey prepared by the Nominating and Corporate Governance Committee wherebyeach director assessed the performance of each other director of the Board ofDirectors.  The Chairman of the Nominatingand Corporate Governance Committee advised each director of the assessment soreceived and forwarded a copy of each of the assessments to the Chairman of theBoard.

 

CEO Performance

 

On an annual basis, the Company’s President and CEO circulates proposedoperating and strategic plans which are discussed and, if appropriate, adoptedby the Board of Directors.  The Board ofDirectors met in December 2007 to review the Company’s one year operatingplan and three year strategic plan. These strategic plans form the basis of the corporate objectives whichthe CEO is responsible for meeting.  TheHuman Resources and Compensation Committee of the Board of Directors assessesthe CEO’s performance against the goals established and agreed to andrecommends his compensation to the Board of Directors as a whole.

 

Shareholder Feedback andCommunication

 

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

 

103

----

 

addition, the Company provides the opportunityfor investors in both Canada and the U.S. to pose questions to seniormanagement, including the CEO, the Chief Operating Officer, the Chief FinancialOfficer and the Executive Director, Investor Relations through public forums suchas conference calls and webcasts.

 

Board of Directors’Expectations of Management

 

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

 

**Employees**

 

As at December 31, 2007,the Company and its subsidiaries employed a total of 497 employees.  The DRAXIS Pharma division is the largestemployer with 389 employees, all located in Kirkland, Québec. The presentcollective agreement at DRAXIS Pharma terminates on April 30, 2008.  We are presently preparing to negotiate a newcollective agreement with the union and cannot assure you that we willnegotiate the same terms as the existing agreement.  See “Risk Factors — Risks Related to ourCompany — Our Business Could be Harmed if there were a Dispute or Disruptionwith our Unionized Employees”. The DRAXIMAGE division employs 97 people all inKirkland, Québec, none of which are unionized. The Company itself employs 11 people, the majority of whom are locatedin Kirkland, Québec, none of which are unionized.  At December 31, 2006 and 2005, theCompany and its subsidiaries had 504 and 492 employees, respectively.

 

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

 

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

 

To the knowledge of the directors and officers of the Company as of December 31,2007, the following are the only persons who, as at the dates mentioned below,beneficially own, directly or indirectly, or exercise control over our commonshares carrying more than five percent (5%) of the votes attached to all ofthose shares.

 
| **Identity of Person or Group**         | ** ** | **Amount Owned**        | ** ** | **Percent of Class** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|----------------------|------------|
| Natcan  Investment Management Inc.      |       | 4,032,202 common shares |       | 9.6                  | %          |
|                                    |       |                    |       |                 |       |
| Neil Gagnon                             |       | 3,431,489 common shares |       | 8.2                  | %          |
|                                    |       |                    |       |                 |       |
| Mackenzie  Financial Corporation        |       | 3,489,500 common shares |       | 8.3                  | %          |
|                                    |       |                    |       |                 |       |
| Beutel,  Goodman & Company Ltd |       | 3,558,250 common shares |       | 8.5                  | %          |
|                                    |       |                    |       |                 |       |
| Acuity  Investment Management Inc.      |       | 2,669,400 common shares |       | 6.3                  | %          |

 

Based on the Schedule 13G public filings and Early Warning Reports underNational Instrument 62-103 in Canada made by Natcan Investment Management Inc.during 2006 and 2007, the percentage of 

 

104

----

 

our common stock beneficially owned by NatcanInvestment Management Inc. increased from 8.9% as at December 31, 2006 to 9.6% as at December 31,2007.

 

Based on the Schedule 13G public filings made by Neil Gagnon during 2006and 2007, the percentage of our common stock beneficially owned by Neil Gagnonincreased from 7.0% in 2006 to 8.2% as at December 31, 2007.

 

Based on the Schedule 13G public filings made by Mackenzie FinancialCorporation during 2006 and 2007, the percentage of our common stock owned byMackenzie Financial Corporation decreased from 10.9% as at December 31,2006 to 8.3% as at December 31,2007.

 

Based on the Schedule 13G public filings made by Beutel, Goodman &Company Ltd, during 2006 and 2007, the percentage of our common stock owned byBeutel, Goodman & Company Ltd increased from 7.3% as at December 31,2006 to 8.5% as at December 31, 2007.

 

Based on the Schedule 13G public filings made by Acuity InvestmentManagement Inc., the percentage of our common stock owned by Acuity InvestmentManagement Inc. is 6.3% as at December 31, 2007.

 

To our knowledge, as of March 18, 2008, 19,390,633 common shares (46.1%****of the outstanding common shares at that date) were held by482 shareholders ofrecord whose registered addresses were in the United States.  The Company has no knowledge of any othershares held beneficially in the United States.

 

As of March 18, 2008, to our knowledgethere were a total of 955shareholders of record holding 42,062,538****common shares issued and outstanding.

 

The building whichhoused the Company’s head office premises at 6870 Goreway Drive in Mississauga,Ontario until February 29, 2008, is owned 50% by Samuel Sarick Limited, acorporation wholly owned by Mr. Sarick, a director of the Company.  The original lease for the premises wasentered into on April 25, 1994 between Samuel Sarick Limited, KentlakeConstruction Limited and Anec Investments Limited, as landlord, and theCompany, as tenant.  The lease renewalwas negotiated between the Company and Samuel Sarick Limited on an arm’s-lengthbasis with the assistance of Colliers International retained by the Company andwas renewed with the approval of the Board of Directors effective May 1,1999 for a period of five years and renewed again on April 26, 2004 for aperiod of two years, which expired on May 31, 2006.  The Company leased the premises on a month tomonth basis on the same terms and conditions as the ones which expired on May 31,2006 until February 29, 2008.  TheCompany believes that the lease terms were consistent with arm’s lengthcomparables and that the annual rent payable of CDN$139,374****was at fair market value. The Companyceased leasing the premises on February 29, 2008.

 

The Company has,in the past, made loans to certain key management personnel in connection withits incentive plans and as inducements to enter into employmentagreements.  These plans have beendiscontinued, and there will be no further indebtedness under said plans.  All outstanding loans were repaid in May 2005.

 

**Item8.   Financial Information**

 

The Company’s Consolidated Financial Statements areattached as pages F-1 through F-28. There have been no significant changes since the date of the financialstatements.

 

105

----

 

 

**Legal/Arbitration Proceedings**

 

From time to time,the Company becomes involved in legal proceedings and claims which arise in theordinary course of business.  With theexception of the matters described below, the Company considers that the ultimateliability with respect to any known actions will not materially affect thebusiness, financial position, results of operations or cash flows of theCompany.

 

In 1998, aCanadian legal proceeding was launched against us and our subsidiary DAHI by aformer consultant, Jozsef Knoll, claiming royalty entitlements based on the netprofit from sales of *ANIPRYL*®.  Total damages claimed are $100 million,including a claim to certain shares of DAHI. However, the plaintiff has taken no steps in the last seven years to movethe claim forward.  While we believe thatwe have good defenses to the Knoll proceeding, this dispute may not be resolvedin our favor, if it is pursued.  It ispossible that a court or arbitration tribunal may find us to be in breach ofcertain agreements, or infringing validly issued patents of third parties orpracticing the intellectual property of others. In that event, in addition to the cost of defending the underlyingproceeding, we may have to pay license fees, additional royalties and/or damagesand may be ordered to assign certain *ANIPRYL®-*relatedpatents and be prohibited from conducting certain activities.  Under such circumstances, we could incursubstantial loss and our business could be negatively affected.

 

On July 22,2005, we announced that, together with other defendants, we had received aStatement of Claim filed before the Superior Court of Justice of Ontarioalleging that PermaxÒ, a drug that we distributed in Canada for a third party manufacturerprior to July 2003, causes “compulsive/obsessive behaviour, includingpathological gambling”.  The plaintiff isseeking to have this action certified as a class action.  We believe this claim against us is withoutmerit and we intend to vigorously defend this proceeding and any motion for certification.  Prior to July 2003, PermaxÒ was distributed in Canada by DRAXIS Pharmaceutica, our Canadianpharmaceutical sales and marketing division. In July 2003, we sold the DRAXIS Pharmaceutica division toShire.  As of December 31, 2007,there have been no developments in this action. On February 29,2008, the plaintiff served an Amended Statement of Claim and a Motion Record insupport of the plaintiff’s motion for certification of this action as a classproceeding.  The defendants must file aresponse to plaintiff’s motion for certification by July 31, 2008.

 

**Item 9.  TheOffer and Listing**

 

The Company’s common sharesare listed on The Toronto Stock Exchange (the “TSX”) under the symbol “DAX” andthe NASDAQ National Market System (“NASDAQ”) in the United States under thesymbol “DRAX”.

 

The following table setsforth, in Canadian dollars, the per share high and low sales prices on the TSXfor the five most recent full financial years:

 

| **Years** | ** ** | **High ($)** | ** ** | **Low ($)** | ** ** |
|-----------|------------|--------------|------------|-------------|------------|
| 2003      |       | 4.75         |       | 1.61        |       |
| 2004      |       | 7.90         |       | 4.12        |       |
| 2005      |       | 7.05         |       | 4.61        |       |
| 2006      |       | 5.80         |       | 4.32        |       |
| 2007      |       | 7.59         |       | 3.29        |       |

 

The following table sets forth, in Canadian dollars, the per share highand low sales prices on the TSX by fiscal quarter for 2007 and 2006.

 

106

----

 

| **2007**       | ** ** | **High****($)** | ** ** | **Low****($)** | ** ** |
|----------------|------------|-----------------|------------|----------------|------------|
| First Quarter  |       | 7.49            |       | 5.36           |       |
| Second Quarter |       | 7.59            |       | 6.00           |       |
| Third Quarter  |       | 7.00            |       | 4.56           |       |
| Fourth Quarter |       | 5.40            |       | 3.29           |       |

 

| **2006**       | ** ** | **High****($)** | ** ** | **Low****($)** | ** ** |
|----------------|------------|-----------------|------------|----------------|------------|
| First Quarter  |       | 5.60            |       | 5.00           |       |
| Second Quarter |       | 5.44            |       | 4.32           |       |
| Third Quarter  |       | 5.37            |       | 4.71           |       |
| Fourth Quarter |       | 5.80            |       | 4.95           |       |

 

The followingtable sets forth, in Canadian dollars, the per share high and low sales pricesand the trading volumes on the TSX from January 2007 to February 2008:

 

| **Months**          | ** ** | **High  ($)** | ** ** | **Low  ($)** | ** ** | **Trading Volumes  (#)** | ** ** |
|---------------------|------------|---------------|------------|--------------|------------|--------------------------|------------|
| January 2007   |       | 6.15          |       | 5.36         |       | 1,536,500                |       |
| February 2007  |       | 6.35          |       | 5.81         |       | 2,357,200                |       |
| March 2007     |       | 7.49          |       | 6.08         |       | 3,069,200                |       |
| April 2007     |       | 7.59          |       | 6.29         |       | 2,051,300                |       |
| May 2007       |       | 6.63          |       | 5.75         |       | 1,563,900                |       |
| June 2007      |       | 6.69          |       | 6.00         |       | 1,051,700                |       |
| July 2007      |       | 7.00          |       | 5.21         |       | 2,784,100                |       |
| August 2007    |       | 5.68          |       | 4.56         |       | 1,446,900                |       |
| September 2007 |       | 5.90          |       | 4.81         |       | 928,800                  |       |
| October 2007   |       | 5.40          |       | 4.88         |       | 979,000                  |       |
| November 2007  |       | 4.44          |       | 3.29         |       | 3,825,700                |       |
| December 2007  |       | 4.13          |       | 3.31         |       | 1,713,300                |       |
| January 2008   |       | 4.25          |       | 3.57         |       | 1,021,584                |       |
| February 2008  |       | 4.09          |       | 3.45         |       | 1,981,646                |       |

 

The followingtable sets forth, in U.S. dollars, the per share high bid and low asked priceson NASDAQ for the five most recent full financial years:

 

| **Years** | ** ** | **High  ($)** | ** ** | **Low  ($)** | ** ** |
|-----------|------------|---------------|------------|--------------|------------|
| 2003      |       | 3.70          |       | 1.09         |       |
| 2004      |       | 5.94          |       | 3.29         |       |
| 2005      |       | 5.84          |       | 3.93         |       |
| 2006      |       | 5.08          |       | 3.90         |       |
| 2007      |       | 6.64          |       | 3.27         |       |

 

107

----

 

The following table sets forth, in U.S. dollars, the per share high andlow asked prices on NASDAQ in U.S. dollars, by fiscal quarter for 2007 and2006:

 

| **2007**       | ** ** | **High****($)** | ** ** | **Low****($)** | ** ** |
|----------------|------------|-----------------|------------|----------------|------------|
| First Quarter  |       | 6.49            |       | 4.56           |       |
| Second Quarter |       | 6.64            |       | 5.19           |       |
| Third Quarter  |       | 6.53            |       | 4.26           |       |
| Fourth Quarter |       | 5.50            |       | 3.27           |       |

 

| **2006**       | ** ** | **High****($)** | ** ** | **Low****($)** | ** ** |
|----------------|------------|-----------------|------------|----------------|------------|
| First Quarter  |       | 4.85            |       | 4.27           |       |
| Second Quarter |       | 4.55            |       | 3.90           |       |
| Third Quarter  |       | 4.75            |       | 3.96           |       |
| Fourth Quarter |       | 5.08            |       | 4.31           |       |

 

The following table sets forth, in U.S. dollars, the per share high andlow sales prices and the trading volumes on NASDAQ from January 2007 to February 2008:

 

| **Months**          | ** ** | **High  ($)** | ** ** | **Low  ($)** | ** ** | **Trading Volumes  (#)** | ** ** |
|---------------------|------------|---------------|------------|--------------|------------|--------------------------|------------|
| January 2007   |       | 5.26          |       | 4.56         |       | 1,579,800                |       |
| February 2007  |       | 5.51          |       | 4.91         |       | 3,826,900                |       |
| March 2007     |       | 6.49          |       | 5.20         |       | 4,559,000                |       |
| April 2007     |       | 6.64          |       | 5.67         |       | 3,217,300                |       |
| May 2007       |       | 6.10          |       | 5.19         |       | 2,560,400                |       |
| June 2007      |       | 6.25          |       | 5.71         |       | 2,183,300                |       |
| July 2007      |       | 6.53          |       | 4.90         |       | 3,156,000                |       |
| August 2007    |       | 5.38          |       | 4.26         |       | 1,693,500                |       |
| September 2007 |       | 5.60          |       | 4.57         |       | 1,140,500                |       |
| October 2007   |       | 5.50          |       | 4.82         |       | 878,300                  |       |
| November 2007  |       | 4.87          |       | 3.53         |       | 1,850,200                |       |
| December 2007  |       | 4.08          |       | 3.27         |       | 884,900                  |       |
| January 2008   |       | 4.25          |       | 3.55         |       | 1,077,900                |       |
| February 2008  |       | 4.17          |       | 3.43         |       | 953,000                  |       |

 

The transfer agentof the Company is Computershare Investor Services Inc., Stock TransferServices, located at 100 University Avenue, Toronto, Ontario, Canada, M5J 2Y1.

 

**Item 10.            Additional Information**

 

**Bylaws and Articles ofAmalgamation**

 

The Company’s Articles of Amalgamation are on file with the CorporationsDirectorate of Industry Canada under Corporation Number 357288-9.  The Articles of Amalgamation do not include astated purpose and do not place any restrictions on the business that theCompany may carry on.

 

108

----

** **

**InspectionRights of Shareholders**

 

Under the CBCA, shareholders are entitled to be provided with a copy ofthe list of registered shareholders of the company.  In order to obtain the shareholder list, theCompany must be provided with an affidavit including, among other things, astatement that the list will only be used for the purposes permitted by theCBCA.  These permitted purposes includean effort to influence of the voting of shareholders of the Company, an offerto acquire securities of the Company and any other matter relating to theaffairs of the Company.  The Company isentitled to charge a reasonable fee for the provision of the shareholder listand must deliver that list no more than ten days after receipt of the affidavitdescribed above.

 

Shareholders of the Company have the right to inspect certain corporaterecords, including its articles and by-laws and minutes of meetings andresolutions of the shareholders. Shareholders have no statutory right to inspect minutes of meetings andresolutions of directors of the Company.

 

Shareholders of the Company have the right to certain financialinformation respecting the Company.  Inaddition to the annual and quarterly financial statement required to be filedunder applicable securities laws, the Company is required to place before everyannual meeting of shareholders its audited comparative annual financialstatements.  In addition, shareholdershave the right to examine the financial statements of each of its subsidiariesand any other corporate entity whose accounts are consolidated in the financialstatements of the Company.

 

**Directors**

 

The minimum number of directors of the Company is one (1) and themaximum number is twelve (12).  Inaccordance with the Company’s bylaws and the Act, a majority of its directorsmust be residents of Canada.  In order toserve as a director, a person must be a natural person at least 18 years ofage, of sound mind and not bankrupt. Neither the Articles of Amalgamation, bylaws, nor the Act, impose anymandatory retirement requirements for directors.

 

Under the Company’s bylaws and the Articles of Amalgamation, a directorof the Company need not be a shareholder. However, in June 2001 the Board of Directors established acorporate policy requiring each current Director to acquire by June 2004(or in the case of future Board of Directors members, within three years oftheir appointment) common shares in the Company equal to five times his or herannual honorarium.  All directors whowere to comply with this requirement by June 2004 were in compliance as ofsaid date.  In February 2005, theBoard of Directors adopted a resolution amending this policy to fix the numberof common shares to be so held at 15,000. Compliance with this policy is monitored annually by the Nominating andCorporate Governance Committee.  As at March 18,2008, all directors were in compliance with this requirement.

 

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

 

·                                          relates primarilyto his or her remuneration as a director, officer, employee or agent of theCompany or an affiliate;

 

·                                          is for indemnityor insurance for director’s liability as permitted by the Act; or

 

·                                          is with anaffiliate of the Company.

 

109

----

 

The Board of Directors may, on behalf of the Company and withoutauthorization of its shareholders:

 

·                                          borrow money uponthe credit of the Company;

 

·                                          issue, reissue,sell or pledge debt obligations of the Company;

 

·                                          give a guaranteeon behalf of the Company to secure performance of an obligation of any person;and

 

·                                          mortgage,hypothecate, pledge or otherwise create a security interest in all or anyproperty of the Company, owned or subsequently acquired, to secure anyobligation of the Company.

 

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

 

These borrowing powers may be varied by the Company’s bylaws or itsArticles of Amalgamation.  However, theCompany’s bylaws and Articles of Amalgamation do not contain any restrictionson or variations of these borrowing powers.

 

The general duties of a director or officer of the Company under theCBCA are to act honestly and in good faith with a view to the best interests ofthe Company and to exercise the care, diligence and skill that a reasonablyprudent person would exercise in comparable circumstances.  Any breach of these duties may lead toliability to the Company and its shareholders for breach of fiduciaryduty.  In addition, a breach of certainprovisions of the CBCA, including the improper payment of dividends or theimproper purchase or redemption of shares, will render the directors whoauthorized such action liable to account to the Company for any amountsimproperly paid or distributed.

 

**Share Capitalization**

 

The Company’s Articles of Amalgamation authorize the issuance of anunlimited number of common shares (42,062,538 of which are outstanding as of March 18,2008), an unlimited number of preferred shares (none of which are issued andoutstanding), and 2,000,000 Employee Participation Shares (2,000,000 of whichhave been issued and none of which remain outstanding as of March 18,2008).  The Articles of Amalgamation donot authorize the issuance of any other class of shares.

 

Common Shares

 

The holders of the common shares of the Company are entitled to receivenotice of and to attend all meetings of the shareholders of the Company andhave one vote for each common share held at all meetings of shareholders.  The directors are elected at each annualmeeting of shareholders and do not stand for re-election at staggeredintervals.

 

110

----

 

 

The holders of common shares are entitled to receive dividends and theCompany will pay dividends, as and when declared by the Board of Directors, outof moneys properly applicable to the payment of dividends, in such amount andin such form as the Board of Directors may from time to time determine, subjectto the rights of the holders of any other class of shares of the Companyentitled to receive dividends in priority to or ratably with the holders of thecommon shares, and all dividends which the Board of Directors may declare onthe common shares shall be declared and paid in equal amounts per share on allcommon shares at the time outstanding.

 

In the event of the dissolution, liquidation or winding-up of theCompany, whether voluntary or involuntary, or any other distribution of assetsof the Company among its shareholders for the purpose of winding-up itsaffairs, the holders of the common shares shall, subject to the rights of theholders of any other class or shares of the Company entitled to receive theassets of the Company upon such distribution in priority to or ratably with theholders of the common shares, be entitled to participate ratably in anydistribution of the assets of the Company.

 

Preferred Shares

 

The preferred shares of the Company may at any time or from time to timebe issued in one or more series.  Nopreferred shares of the Company have been issued to date.  Preferred shares shall be entitled to preferenceover the common shares and any other shares of the Company ranking junior tothe preferred shares and the distribution of assets in the event of anyliquidation and common dissolution or winding-up of the Company, whethervoluntary or involuntary, or other distribution of the assets of the Companyamong its shareholders for the purpose of winding-up its affairs.  The preferred shares of each series shallrank in parity with the preferred shares of every other series with respect topriority in the payment of dividends and in the distribution of assets in theevent of liquidation, dissolution or winding-up of the Company.

 

Subject to the provisions relating to any particular series, the Companymay redeem the whole or any part of the preferred shares on any one or moreseries outstanding from time to time at such price or prices as may beapplicable to such series by giving at least thirty (30) days’ prior notice inwriting of the intention of the Company to redeem such shares to each personwho at the date of giving such notice is the registered holder of preferredshares to be redeemed.

 

The preferred shares may be issued on the authorization of thedirectors, without further authorization by the shareholders, but the issuanceof any preferred share is subject to the general duties of the directors underthe CBCA to act honestly and in good faith with a view to the best interests ofthe Company and to exercise the care, diligence and skill that a reasonablyprudent person would exercise in comparable circumstances.  The issuance of any preferred shares in theface of a take-over bid for the Company would be examined in light of theseduties of the directors and other applicable case law.

 

Shareholder Actions

 

TheCBCA provides that shareholders of the Company may, with leave of a court,bring an action in the name of and on behalf of the Company for the purpose ofprosecuting, defending or discontinuing an action on behalf of theCompany.  In order to grant leave topermit such an action, the CBCA provides that the court must be satisfied thatthe directors of the Company were given adequate notice of the application, theshareholder is acting in good faith and that it appears to be in the Company’sbest interests that the action be brought.

 

111

----

 

Employee Participation Shares

 

On February 16, 1995, the Board of Directors of the Companyauthorized 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 BParticipation Shares and on May 12, 1999, the Board of Directors of theCompany authorized the issuance of 470,000 Series C ParticipationShares.  The Employee Participation SharePurchase 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 timeas dividends, if any, are paid on the common shares of the Company, in anamount for each participation share of a particular series which is equal tothe proportion of the amount of the dividend declared on each common share thatthe subscription price of such participation share is of the fair market valueat 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; oron the “Automatic Conversion Date” (as defined in the Articles of Amalgamationand the terms of the EP Plan); or at the option of the holder on a “ConversionDate” (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 ofAmalgamation and the terms of the EP Plan), the participation shares will becomecommon shares, and the number of common shares a holder receives on conversionis the number of common shares which is determined by multiplying the number ofparticipation shares held, or in the case of conversion on a Conversion Dateother than the Automatic Conversion Date, the number of participation shareswhich the holder elects to convert, by a fraction:

 

1.                the numerator of which shall be the “EP ShareValue”(as defined in the Articles of Amalgamation and the terms of the EP Plan)of a participation share of a particular series as at the earlier of the“Automatic Conversion Date” and a “Conversion Date” as the case may be; and

2.                the denominator of which shall be the “Fair MarketValue of a Common Share” (as defined in the Articles of Amalgamation and theterms of the EP Plan) as at the earlier of the two dates described in 1;provided that no fractional common shares will be issued and no payment will bemade in respect of fractional common shares.

 

On January 14, 2004,the 245,000 Series C participation shares, which were the only outstandingemployee participation shares, were converted into 54,896 common shares of theCompany.

 

Warrants

 

In April 2004, the Company closed an equity financing offering of3,053,436 units consisting of one common share and one-half of one sharepurchase warrant per unit.  Each wholewarrant entitled its holder to acquire one common share at a price of CDN$8.50,subject to certain adjustments, at any time prior to April 24, 2006.  The warrants are transferable. Holders ofwarrants do not, as such, have any voting rights or other right attaching tothe common shares until the warrants are properly exercised and common sharesissuable upon the exercise of the warrants are issued.  All warrants expired unexercised on April 24,2006.

 

Pursuant to the terms of the indenture relating to the warrants enteredinto between the Company and Computershare Investor Services Inc., subject toapplicable law, the Company could purchase prior to April 24, 2006, byprivate contract or otherwise, all of or any of the warrants then outstandingand any warrants so purchased would have been cancelled.  No warrants were so purchased.

 

112

----

 

Shareholder Rights Plan

 

On May 16, 2002, the shareholders of the Company approved aShareholder Rights Plan Agreement (the “Rights Plan”), which was reconfirmed atthe Annual General Meeting dated May 18, 2005, the principal terms ofwhich are as follows:

 

***Effective Date***

*** ***

The Rights Plan became effective on April 23, 2002 (the “EffectiveDate”) and was approved by shareholders of the Company at its Annual andSpecial Meeting of shareholders held on May 16, 2002.

 

***Term***

*** ***

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

 

***Issue of Rights***

*** ***

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

 

***Rights Exercise Privilege***

*** ***

The Rights will separate from the shares to which they are attached andwill become exercisable at the time (the “Separation Time”) that is ten tradingdays after the earlier of a person having acquired, or the commencement,announcement or other date determined by the Board of Directors in respect of atakeover bid to acquire, 20% or more of the common shares, other than by an acquisitionpursuant 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, of20% or more of the common shares, other than by way of a Permitted Bid, isreferred to as a “Flip-in Event”.  Underthe Rights Plan, there are certain exceptions to that rule, including (i) theCompany or a subsidiary of the Company, (ii) a person who acquires 20% ormore of the outstanding common shares through, among other things, a shareredemption or a Permitted Bid, (iii) an underwriter or selling groupmember during the course of a public distribution; or (iv) investment andfund managers, trust companies and other persons who are managing investmentfunds, 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 takeoverbid.  Any Rights held by an AcquiringPerson on or after the earlier of the Separation Time or the first date ofpublic announcement by the Company or an Acquiring Person that an AcquiringPerson 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” anyshareholder of the Company without triggering the Rights Plan so long as thelock-up agreement is a “soft” lock up, meaning the locked-up shareholder isentitled to tender to a higher offer (so long as the higher offer is notrequired under the lock-up agreement to be more than 7% higher than the firstoffer).

 

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

 

113

----

 

The issue of the Rights is not initiallydilutive.  Upon a Flip-in Event occurringand the Rights separating from the attached shares, reported earnings percommon share on a fully diluted or non-diluted basis may be affected.  Holders of Rights who do not exercise theirRights upon the occurrence of a Flip-in Event may suffer substantial dilution.

 

***Certificates and Transferability***

*** ***

Prior to the Separation Time,the Rights will be evidenced by a legend imprinted on certificates for commonshares issued from and after the Effective Date.  Rights are also attached to such sharesoutstanding on the Effective Date, although share certificates issued prior tothat date will not bear such a legend. Prior to the Separation Time, Rights will not be transferable separatelyfrom the attached shares.  From and afterthe Separation Time, the Rights will be evidenced by Rights certificates whichwill be transferable and traded separately from the shares.

 

***Permitted Bid Requirements***

*** ***

The requirements of a Permitted Bid include the following:

 

·                                          the takeover bidmust be made by way of a takeover bid circular to all holders of common shares;

 

·                                          the takeover bidmust not permit common shares tendered pursuant to the takeover bid to be takenup prior to the expiry of a period of not less than sixty (60) days and only ifat such time more than 50% of the common shares held by shareholders other thanthe bidder, its affiliates, associates and persons acting jointly or in concertwith the bidder (the “Independent Shareholders”) have been tendered pursuant tothe takeover bid and not withdrawn; and

 

·                                          if more than 50%of the common shares held by Independent Shareholders are tendered to thetakeover bid within the sixty (60) day period, the bidder must make a publicannouncement of that fact and the takeover bid must remain open for deposits ofcommon shares for an additional ten (10) business days from the date ofsuch public announcement.

 

The Rights Plan allows a competing Permitted Bid (a “Competing PermittedBid”) to be made while a Permitted Bid is in existence.  A Competing Permitted Bid must satisfy allthe requirements of a Permitted Bid except that it may expire on the same dateas the Permitted Bid, subject to the requirement that it be outstanding for aminimum period of thirty-five (35) days.

 

***Waiver***

*** ***

The Board of Directors may, prior to a Flip-in Event, waive the dilutiveeffects of the Rights Plan in respect of a particular Flip-in Event (an “ExemptAcquisition”) that would result from a takeover bid made by way of a takeoverbid circular to all holders of common shares, provided that in suchcircumstances the Board shall be deemed to have waived the application of theRights Plan to any other Flip-in Event occurring as a result of a takeover bidmade by way of a takeover bid circular to all holders of common shares prior tothe expiry of any takeover bid in respect of which the Rights Plan has beenwaived.  The Board of Directors may alsowaive the Rights Plan in respect of a particular Flip-in Event that hasoccurred through inadvertence, provided that the Acquiring Person thatinadvertently triggered such Flip-in Event reduces its beneficial holdings toless than 20% of the outstanding voting shares of the Company within fourteen(14) days or such other period as may be specified by the Board of Directors.

 

114

----

 

***Redemption***

*** ***

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

 

***Supplements and Amendments***

*** ***

The Company is authorized to make amendments to the Rights Plan tocorrect any clerical or typographical error or, subject to subsequentratification by shareholders or Rights holders, to maintain the validity of theRights Plan as a result of changes in law or regulation.  Other amendments or supplements to the RightsPlan may be made with the prior approval of shareholders or Rights holders.

 

**Action Necessary to Change Rightsof Shareholders**

 

In order to change the rights of our shareholders, the Company wouldneed to amend its Articles of Amalgamation to effect the change.  Such an amendment would require the approvalof holders of two-thirds of the common shares cast at a duly called specialmeeting.  For certain amendments such asthose creating of a class of preferred shares, a shareholder is entitled underthe Act to dissent in respect of such a resolution amending the Articles ofAmalgamation and, if the resolution is adopted and the Company implements suchchanges, demand payment of the fair value of its common shares.

 

**Meeting of Shareholders**

 

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

 

Notice of the time and place of each meeting of shareholders must begiven not less than twenty-one (21) days, nor more than fifty (50) days, beforethe date of each meeting to each director, to the auditor and to eachshareholder who at the close of business on the record date for notice isentered in the securities register as the holder of one or more shares carryingthe right to vote at the meeting.  Noticeof meeting of shareholders called for any other purpose other thanconsideration of the minutes of an earlier meeting, financial statements andauditor’s report, election of directors and reappointment of the incumbentauditor, must state the nature of the business in sufficient detail to permitthe shareholder to form a reasoned judgment on and must state the text of anyspecial resolution or bylaw to be submitted to the meeting.

 

The only persons entitled to be present at a meeting of shareholders arethose entitled to vote, the directors of the Company and the auditor of theCompany.  Any other person may beadmitted only on the invitation of the chairman of the meeting or with theconsent of the meeting.  In circumstanceswhere a court orders a meeting of shareholders, the court may direct how themeeting may be held, including who may attend the meeting.

 

Theholders of not less than five percent of the outstanding voting shares of theCompany may requisition the directors of the Company to call a meeting ofshareholders for the purpose stated in the requisition.  Except in limited circumstances, includingwhere a meeting of shareholders has already been 

 

115

----

 

called and a notice of meeting already given or whereit is clear that the primary purpose of the requisition is to redress apersonal grievance against the Company or its directors, officers orshareholders, the directors of the Company shall call a meeting ofshareholders.  If the directors fail tocall a meeting of shareholders within twenty-one (21) days after receiving therequisition, any shareholder who signed the requisition may call the meeting ofshareholders and, unless the shareholders resolve otherwise at the meeting, theCompany shall reimburse the shareholders for the expenses reasonably incurredby them in requisitioning, calling and holding the meeting of shareholders.

 

TheCBCA also provides that, except in limited circumstances, a resolution inwriting signed by all of the shareholders entitled to vote on that resolutionat a meeting of shareholders is as valid as if it had been passed at a meetingof shareholders.

 

**Limitations on Right to OwnSecurities**

 

Neither Canadian law nor the Company’s Articles of Amalgamation orbylaws limit the right of a non-resident to hold or vote common shares of theCompany, other than as provided in the Investment Canada Act (the “InvestmentAct”).  The Investment Act prohibitsimplementation of certain direct reviewable investments by an individual,government or agency thereof, corporation, partnership, trust or joint venturethat is not a “Canadian,” as defined in the Investment Act (a “non-Canadian”),unless, after review, the minister responsible for the Investment Act issatisfied or is deemed to be satisfied that the investment is likely to be ofnet benefit to Canada.  An investment inthe 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 aninvestment to acquire direct control of the Company, and the book value of theassets of the Company were CDN$5.0 million or more (provided that immediatelyprior to the implementation of the investment the Company was not controlled byWTO Investors).  An investment in commonshares of the Company by a WTO Investor (or by a non-Canadian other than a WTOInvestor if, immediately prior to the implementation of the investment, theCompany was controlled by WTO Investors) would be reviewable under theInvestment Act if it were an investment to acquire direct control of theCompany (in 2007) and the value of the assets of the Company equaled orexceeded CDN$281.0 million.  Anon-Canadian, whether a WTO Investor or otherwise, would be deemed to acquirecontrol of the Company for purposes of the Investment Act if he or she acquireda majority of the common shares of the Company. The acquisition of less than a majority, but at least one-third of theshares, would be presumed to be an acquisition of control of the Company,unless it could be established that the Company was not controlled in fact bythe acquirer through the ownership of the shares.  In general, an individual is a WTO Investorif he or she is a “national” of a country (other than Canada) that is a memberof the World Trade Organization (“WTO Member”) or has a right of permanentresidence in a WTO Member.  A corporationor other entity will be a “WTO Investor” if it is a “WTO Investor-controlledentity” pursuant to detailed rules set out in the Investment Act.  The United States is a WTO Member.  Certain transactions involving the Company’scommon shares would be exempt from the Investment Act, including:

 

(a)                                  an acquisition of the shares if theacquisition were made in the ordinary course of that person’s business as atrader or dealer in securities;

(b)                                 an acquisition of control of the Companyin connection with the realization of a security interest granted for a loan orother financial assistance and not for any purpose related to the provisions ofthe Investment Act; and

(c)                                  an acquisition of control of the Companyby reason of an amalgamation, merger, consolidation or corporatereorganization, following which the ultimate direct or indirect control in factof the Company, through the ownership of voting interests, remains unchanged.

 

116

----

 

**Dividend Policy**

** **

For the years ended December 31, 2003, 2004, 2005, 2006 and 2007,we have not declared or paid any dividends on our common shares.

 

**Material Contracts**

 

Supply Agreements andDistribution Agreements

 

On October 25, 1995, Frosst Radiopharmaceuticals, a division ofMerck Frosst Canada Inc. (now known as DRAXIMAGE) entered into a non-exclusivedistribution agreement with Syncor International Corporation (now known asCardinal Health 414, LLC) for distribution in the U.S. of DTPA, a kit used toprepare Tc-99m Pentetate to study kidney clearance, and MDP, a kit used toprepare Tc-99m Methylene Diphosphonic Acid to study bone metabolism.  The initial term was for five years, with automaticrenewal of the agreement for successive two-year periods unless a partynotifies the other of its intent to renew at least one year prior to theexpiration of the renewal term.

 

On July 12, 2000 DRAXIMAGE signed a non-exclusive distributionagreement with Syncor International Corporation (now known as Cardinal Health414, LLC) for the production of a kit for the preparation of Sodium IodideI-131 Capsules and Oral Solution indicated for the treatment of thyroid cancerand hyperthyroidism for sale in the U.S. The term of the agreement is five years from the date DRAXIMAGE makesthe first sale of the product.  The dateof the first sale was March 2003. This agreement was amended on August 6, 2003 to provide thatDRAXIMAGE could distribute the product to independent radiopharmacies in theU.S.  The contract is renewedautomatically for three year terms, unless a notice of non renewal is receivedat least six months prior to the expiration of a renewal term.  As of March 31, 2008, no such notice hasbeen received.

 

On July 1, 1999, DRAXIS Pharma entered into a five-yearmanufacturing and supply agreement with Warner-Lambert Canada Inc. (which thenbecame known as Pfizer Consumer Healthcare, a division of Pfizer Canada Inc.)covering several non prescription products for the Canadian market, includingPolysporinÒ, SudafedÒ, ActifedÒ and ZincofaxÒ.  Manufacturing of these products commenced inearly 2000.  On September 1, 2005,DRAXIS Pharma announced it had renewed its agreement with Pfizer Canada for athree year term effective January 1, 2005. On December 20, 2006, DRAXIS Pharma was advised that J&J hadpurchased Pfizer’s consumer healthcare business and that the agreement wasassigned to J&J.  The Agreement wassubsequently renewed for a one year period ending December 31, 2008.

 

On December 18, 2001, DRAXIS Pharma finalized supply and relatedagreements with GSK for the renewal and expansion of an existing contractmanufacturing relationship between the companies.  The products transferred to DRAXIS Pharmawere all established, sterile products marketed by GSK in multipleinternational markets.  In 2002, aprescription sterile injectable product for the U.S. market was added underthis contract and commercial production of this product commenced in the secondquarter of 2002.  During 2002, sitetransfer and related activities associated with the other GSK productscontinued and production started in the second quarter of 2003 and ramped upthrough 2003 and 2004 with full production achieved by the end of 2004.  DRAXIS Pharma shall manufacture the productscovered by the agreement until it receives a termination notice from GSK whichmay be given by a two-year advance written notice given on or after December 31,2007.  As of March 31, 2008, theCompany has not received any such notice.

 

On March 3, 2003, DRAXIS Pharma signed a manufacturing agreementwith Bone Care International, Inc. (now Genzyme Corporation) to produceHectorolÒ Injection forsale in the U.S. and 

 

117

----

 

began commercial shipments of the sterileinjectable product in March 2003. Production of HectorolÒ Injection increasedsubstantially throughout 2005.  Theagreement is for a five-year term and is automatically renewed at the end ofits term for one year period unless either party gives written notice of nonrenewal to the other party one year prior to the end of the term or the end ofa renewal period.  To date, the Companyhas not received any such notice.

 

On June 10, 2004, the Company entered into an Amended and RestatedLoan Agreement with the National Bank of Canada providing an operating facilityof CDN$15 million (or U.S. equivalent), payable within 364 days of drawing uponthe facility and a term facility of CDN$10 million (or U.S. equivalent),repayable in full in three years.  Theoperating facility can be extended by one year upon agreement with thebank.  Interest under both the term andoperating facilities is based on the bank’s prime lending rate, depending onwhether the Company meets certain ratios which as at December 31, 2006were met.  This agreement was not renewedat its termination on June 9, 2007.

 

On July 22,2003, the Company entered into an Asset Purchase Agreement with Shire BioChemInc., pursuant to which the Company sold Shire the rights to substantially allremaining products of its Canadian pharmaceutical sales and marketing division,DRAXIS Pharmaceutica, in return for $9.6 million (CDN$13.5 million) in cash andup to an additional $2.9 million (CDN$4.0 million) in market-driven contingentmilestone payments, plus royalties on future product sales.  Under the terms of the agreement, DRAXISreceived the value of acquired inventories, and Shire assumed responsibilityfor the financial provisions of the license agreement related to Permax®.

 

On September 4,2007, the Company entered into a new definitive supply agreement with Johnson &Johnson Consumer Companies to provide commercial manufacturing services for abroad portfolio of multiple non-sterile specialty semi-solid products currentlymarketed in the United States.  This newmulti-year contract runs to the end of 2013. It includes approximately twoyears of manufacturing site transfer and process validation activities followedby five years of commercial production, which is scheduled to begin in 2009.Commercial production is expected to generate incremental revenues in excess of$120 million over the five year period of 2009 through 2013.  A copy of the supply agreement is filed as Exhibit 4.68to this Annual Report (Form 20-F).

 

In connection withthe supply agreement with JJC, DRAXIS Pharma also signed a credit agreementwith Johnson & Johnson Finance Corporation (“JJFC”) as of September 4,2007 which provides that JJFC shall provide credit facilities of up to $12.2million.  The credit facilities will beused by DRAXIS Pharma solely to finance the acquisition and installation ofequipment and to finance the cost of transfer of the technology required forthe pre-validation work in support of the manufacture by DRAXIS Pharma of theproducts under the supply agreement.  Acopy of the credit agreement is filed as Exhibit 4.69 to this AnnualReport (Form 20-F).

 

On December 20,2007, DRAXIMAGE, DRAXIS’ radiopharmaceutical division, entered into adistribution agreement with GE Healthcare, an industry leader in nuclearmedicine, as the exclusive distributor of DRAXIMAGE® Sestamibi inthe United States. DRAXIMAGE® Sestamibi is a generic kit for thepreparation of Technetium (“Tc-99m”) Sestamibi injection, a diagnostic cardiacimaging agent used in myocardial perfusion imaging (“MPI”) to evaluate bloodflow to the heart.  DRAXIMAGE has grantedGE Healthcare the exclusive right to market, distribute and sell its genericDRAXIMAGE® Sestamibi in the U.S. market and through its U.S. andCanadian radiopharmacy network once the primary innovator patent expires andmarketing authorizations are received from the U.S. Food and DrugAdministration (“FDA”) and Health Canada. Furthermore, GE Healthcare has agreedto purchase Technetium Tc-99m Sestamibi injection exclusively from DRAXIMAGE.The initial term of the distribution agreement is for a minimum of three yearsfollowing FDA approval of DRAXIMAGEÒ

 

118

----

 

Sestamibi.  A copy of the distribution agreement is filedas Exhibit 4.70 to this Annual Report (Form 20-F).

 

Employment and Employment related Agreements

 

On September 24, 2003,the Company, upon the recommendation of the Human Resources and CompensationCommittee, entered into a Retirement Compensation Agreement (“RCA”) with Dr. Barkinto phase out the liability of the Company under the termination without causeprovisions of his employment agreement. The RCA called for the Company to make payments totalling CDN$1.4million to Dr. Barkin.  All of therequired payments were made.

 

In April 2003, the Company entered into an employment agreementwith Mr. Durham, pursuant to which Mr. Durham agreed to be employedas the President of DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a divisionof DRAXIS Specialty Pharmaceuticals Inc.). In the event that Mr. Durham is terminated without cause, he wouldbe entitled to receive a payment equal to one year of base salary.  In the event that Mr. Durham isterminated without cause following a defined change of control, he would beentitled to receive a payment equal to two years of base salary.  Mr. Durham ceased being an employee ofthe Company on July 20, 2007.

 

In October 2003, the Company entered into an employment agreementwith Ms. Gualtieri, pursuant to which Ms. Gualtieri agreed to beemployed as General Counsel and Corporate Secretary of DRAXIS.  In the event that Ms. Gualtieri isterminated without cause, she would be entitled to receive a payment equal toone year of base salary.  In the eventthat Ms. Gualtieri is terminated without cause following a defined changeof control, she would be entitled to receive a payment equal to two years ofbase salary.

 

In March 2004, the Company entered into an employment agreementwith Mr. Huang, pursuant to which Mr. Huang agreed to be employed asVice President Finance of DRAXIS.  In theevent that Mr. Huang is terminated without cause, he would be entitled toreceive a payment equal to one year of base salary.  In the event that Mr. Huang is terminatedwithout cause following a defined change of control, he would be entitled toreceive a payment equal to two years of annual remuneration.  Mr. Huang will cease to be employed bythe Company as of March 31, 2008.

 

In March 2004, the Company entered into an employment agreementwith Mr. Oleksiw, pursuant to which Mr. Oleksiw agreed to be employedas Chief Financial Officer of DRAXIS.  Inthe event that Mr. Oleksiw is terminated without cause, he would beentitled to receive a payment equal to one year of base salary.  In the event that Mr. Oleksiw isterminated without cause following a defined change of control, he would beentitled to receive a payment equal to two years of annual remuneration.

 

In March 2004, in order to conform with the terms of the StockOption Plan approved by the shareholders of the Company in 2001, the Companyentered 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 terminationof employment without cause following a defined change of control of theCompany, Mr. Carter, Mr. Durham, Ms. Gualtieri and Mr. Ormiston,as the case may be, would be entitled to exercise all stock options and othersecurities, including those not then otherwise exercisable.  Mr. Durham ceased being an employee ofthe Company on July 20, 2007.  Inaddition, under the terms of the amended employment agreement, Ms. Gualtieriis entitled, in the event of a termination without cause following a definedchange of control, to receive a payment equal to two years annual remuneration.

 

119

----

 

In November 2007, Mr. Carter’s employment agreement wasamended so that he ceased to be an officer of the Company and to provide thathe was no longer entitled to any payment in the event of a termination of hisemployment following a defined change of control.

 

On July 8, 2005, the Company, upon the recommendation of the HumanResources and Compensation Committee, entered into an agreement with Dr. Flanaganwith respect to the payment of his long term incentive award under theDRAXIMAGE Long Term Incentive Plan by entering into a Retirement CompensationAgreement (“RCA”) in his favour for a total amount of CDN$2.2 million.  The RCA called for the Company to makepayments totalling CDN$2.2 million to Dr. Flanagan.  An amount of CDN$932,222 was paid in 2005, anamount of CDN$724,444 was paid in 2006 and an amount of CDN$543,333 was paid in2007.  No sum remains outstanding underthe RCA.  Dr. Flanagan ceased to bean employee of the Company on December 31, 2006.

 

In January 2008, the employment agreements of each of Ms. Gualtieri,Mr. Oleksiw and Mr. Ormiston were modified so that in the event of atermination of their employment following a defined change of control event,each of these employees would be entitled to receive a payment equal to: (i) two(2) times his or her base salary, and (ii) two (2) times theamount paid as a discretionary bonus for the preceding calendar yearimmediately prior to the change of control and, if no such bonus was made forthe preceding year, a payment equal to two (2) times the prorated portionof any eligible bonus payment up to the date of termination, and (iii) two(2) times the prorated portion of his or her RRSP payment, and (iv) six(6) months coverage in the Company’s benefit plans.  A copy of each of the amendments to theemployment agreements for Ms. Gualtieri, Mr. Oleksiw and Mr. Ormistonare filed as Exhibit 4.71, 4.72 and 4.73 to this Annual Report (Form 20-F).

 

In February 2008, the Company entered into an employment contractwith Mr. Brazier following his appointment as President and ChiefExecutive Officer of the Company.  Thecontract is not for a fixed period of time. In the event of a termination of his employment without cause which isnot due to a defined change of control event, Mr. Brazier is entitled toreceive a payment equal to (i) eighteen (18) months of his base salary,and (ii) a prorated portion of any eligible bonus payment up to the dateof termination, and (iii) a prorated portion of the RRSP payment, and (iv) six(6) months coverage in the Company’s benefit plans.  In the event of a termination of hisemployment without cause following a defined change of control of the Company, Mr. Brazieris entitled to receive a payment equal to (i) three (3) times hisbase salary, and (ii) three (3) times the amount paid as adiscretionary bonus for the preceding calendar year immediately prior to thechange of control, and (iii) three (3) times the prorated portion ofthe RRSP payment, and (iv) six (6) months coverage in the Company’sbenefit plan.  A copy of the employmentagreement is filed as Exhibit 4.74 to this Annual Report (Form 20-F).

 

In March 2008, the Company entered into an employment contract withMr. Robert following his appointment as Chief Operating Officer of theCompany.  The contract is not for a fixedperiod of time.  In the event of atermination of his employment without serious reason which is not due to adefined change of control event, Mr. Robert is entitled to receive a payment equalto one (1) year of base salary if the termination is on or prior to December 31,2008 and one (1) year of base salary plus an amount equal to the bonuspayment if any was received in proceeding calendar year, if the termination ison January 1, 2009 or thereafter. In addition, Mr. Robert is entitled to receive a prorated portionof his RRSP payment and six (6) months coverage in the Company’s benefitplans.  In the event of a termination ofhis employment without serious reason following a defined change of control ofthe Company, Mr. Robert is entitled to receive a payment equal to: (i) two(2) times his base salary, and (ii) two (2) times his RRSPpayment, and (iii) six (6) months coverage in the Company’s benefitplans.  A copy of the employmentagreement is filed as Exhibit 4.75 to this Annual Report (Form 20-F).

 

120

----

 

 

In March 2008,the employment agreement of Ms. Gualtieri was modified so that herdiscretionary bonus entitlement was increased to 40% from 30% effective January 1,2008.  A copy of the amendment to the employmentagreement is filed as Exhibit 4.76 to this Annual Report (Form 20-F).

 

**Exchange Controls**

 

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

 

**Canadian Federal Income TaxConsiderations**

 

The following summary describes the principal Canadian federal incometax considerations generally applicable under the Income Tax Act (Canada) (the“ITA”) to a holder of the Company’s common shares (“Shares”) who holds suchShares as capital property and who deals at arm’s length, and is notaffiliated, with the Company, all within the meaning of the ITA.  Generally, the Shares will be considered tobe capital property to a holder provided that the holder does not use or hold,and is not deemed to use or hold, the Shares in the course of carrying on abusiness or as part of an adventure or concern in the nature of trade.  Certain holders resident in Canada whose Shares mightnot otherwise qualify as capital property may be entitled tomake an irrevocable election in accordance with subsection 39(4) of the ITA tohave such Shares and any other “Canadian security” (as defined in the ITA)treated as capital property in the taxation year of the election and in allsubsequent taxation years.  Holdersconsidering such an election should consult their tax advisors.  Certain holders, including financialinstitutions, registered securities dealers (each as defined in the ITA) andcorporations controlled by one or more of the foregoing, are generallyprecluded from treating the Shares as capital property.

 

This summary is not applicable to ‘‘financial institutions’’ (as definedin the ITA) that are subject to the “mark-to-market” rules in the ITA, toa “specified financial institution” (as defined in the ITA), to a holder aninterest in which is a “tax shelter investment” (as defined in the ITA), or toa holder to which the “functional currency” reporting rules in subsection261(4) of the ITA apply.  Suchholders shouldconsult their own tax advisors.  Persons to whom this summary is applicableare referred to herein as “Holders.”

 

This summary is based on the provisions of the ITA and the regulationsthereunder (the “Regulations”) in force on the date hereof and the Company’sunderstanding of the current administrative policies and practices published inwriting by the Canada Revenue Agency (“CRA”) prior to the date hereof.  This summary takes into account all specificproposals to amend the ITA and the Regulations which have been publiclyannounced by or on behalf of the Minister of Finance (Canada) prior to the datehereof (the “Proposed Amendments”) and assumes that all such ProposedAmendments will be enacted in their present form.  No assurance can be given that the ProposedAmendments will be enacted in the form proposed, if at all.  This summary does not otherwise take intoaccount or anticipate any changes to the law, whether by judicial, governmental orlegislative decision or action or changes in the administrative policies andpractices of the CRA, nor does it take into account provincial, territorial orforeign income tax legislation or considerations which may differ materiallyfrom those described in this summary.

 

**This summary is of a general nature only and isnot exhaustive of all possible Canadian federal income tax considerations andis not intended to be, nor should it be construed to be, legal, business or taxadvice or representations to any particular holder.  Accordingly, holders should consult their owntax advisors with respect to the tax consequences to them of selling Sharesunder**

 

121

----

 

**the Offer, having regard to theirparticular circumstances, including the application and effect of the incomeand other tax laws of any country, province, territory, state or local taxauthority.**

 

Allamounts relating to the acquisition, holding or disposition of Shares,including dividends, adjusted cost base and proceeds of disposition, must beexpressed in Canadian dollars as determined in accordance with the rules inthe ITA, including subsection 261(2).

 

*Shareholders Not Resident in Canada*

 

The following portion of the summary generally isapplicable to a Holder of the Company’s Shares who, at all relevant times andfor the purposes of the ITA and any applicable tax treaty or convention, isnot, and is not deemed to be, resident in Canada, does not hold or use and isnot deemed to hold or use such Shares in connection with, or in the course ofcarrying on a business in Canada, is not an insurer that carries on aninsurance business in Canada and elsewhere and is not an authorized foreignbank.  Such non-resident holders ofShares to whom this summary is applicable are referred to herein as“Non-Resident Holders.”

 

Dividends — Non-ResidentHolders

 

Dividends, including stock and cash dividends and certain distributionsand redemptions deemed to be dividends under the ITA, on the Shares paid orcredited or deemed to be paid or credited to a Non-Resident Holder will besubject to Canadian withholding tax at a rate of 25%.  The applicable rate of withholding may,however, be reduced by virtue of the terms of any applicable tax treaty.  Under the Canada-United States Income TaxConvention, 1980 (the “US Treaty”), the rate applicable to Non-Resident Holdersthat are United States residents who are beneficial owners of Shares isgenerally 15%.  Under the US Treaty,certain tax-exempt entities that are resident in the United States may beexempt from Canadian withholding tax levied in respect of dividends paid on theShares.  Such tax-exempt entities shouldconsult their own tax advisors.  ANon-Resident Holder should also consult its own tax advisors regarding itsability to claim foreign tax credits with respect to any Canadian withholdingtax.

 

Dispositions by Non-ResidentHolders

 

A Non-Resident Holder will not be subject to tax underthe ITA in respect of any capital gain realized as a consequence of adisposition or deemed disposition of Shares (other than to the Company), exceptto the extent that such shares constitute or are deemed to constitute taxableCanadian property (“TCP”) (as defined in the ITA) and the Non-Resident Holderis not otherwise entitled to relief under the terms of any applicable taxtreaty.  Under the US Treaty, a capitalgain realized by a Non-Resident Holder that is a resident of the United Statesfor such purposes will not be subject to Canadian tax, provided that the valueof the Shares is not derived principally from real property (as defined in theUS Treaty) situated in Canada.

 

In general, provided the Shares are listed on adesignated stock exchange (which currently includes the TSX), the Shares willnot constitute TCP of a Non-Resident Holder so long as it has not, either aloneor in combination with persons with whom the Holder does not deal at arm’s length,owned (or had an option to acquire) 25% or more of the issued shares of anyclass or series of the capital stock of the Company at any time within the 60month period preceding the disposition.

 

122

----

 

*Shareholders Resident in Canada*

 

The following portion of the summary generally is applicable to aHolder who, at all relevant times and for purposes of the ITA and anyapplicable tax treaty or convention, is, or is deemed to be, resident in Canada(a “Canadian Holder”).

 

Dividends to Canadian Holders

 

Dividends, including stock and cash dividends andcertain distributions and redemptions deemed to be dividends under the ITA, onthe Shares paid to a Canadian Holder will be included in computing its incomefor purposes of the ITA.  Such dividendsreceived or deemed to be received by an individual (other than a trust) willgenerally be subject to the gross-up and dividend tax credit rules normallyapplicable to taxable dividends received from taxable Canadian corporations.  An enhanced dividend tax credit is applicableto certain “eligible dividends” received after 2005 from certain taxableCanadian corporations.  A dividend willbe eligible for the enhanced dividend tax credit if the individual CanadianHolder receives notice from the Company designating the dividend as an“eligible dividend”.  Dividends receivedor deemed to be received on Shares by an individual and certain trusts may giverise to alternative minimum tax.

 

Generally, dividends received or deemed to be receivedon Shares by a Holder that is a corporation resident in Canada will be includedin computing the corporation’s income, but will be deductible in computing thecorporation’s taxable income, subject to certain limitations in the ITA.  To the extent that such a deduction isavailable, private corporations (as defined in the ITA) and certain othercorporations may be liable to pay refundable tax under Part IV of the ITAat a rate of 33 1/3% on the amount of the dividend.  Subsection 55(2) of the ITA providesthat where certain corporate holders of shares receive a dividend or deemeddividend in specified circumstances, all or part of such dividend may betreated as a capital gain from the disposition of capital property and not as adividend.  Corporate Canadian Holdersshould consult their tax advisors concerning the potential application ofsubsection 55(2).

 

Disposition by CanadianHolders

 

On a disposition or deemed disposition of a Share aCanadian Holder will realize a capital gain (or capital loss) equal to theamount by which the proceeds of disposition for the Share exceed (or are lessthan) the aggregate of the adjusted cost base (determined in accordance withthe ITA) to the Holder of the Share immediately before the disposition and anyreasonable costs of disposition.

 

Generally, one-half of any such capital gain (a“taxable capital gain”) must be included in computing the Holder’s income inthe year of disposition and one half of any such capital loss (an “allowablecapital loss”) will be required to be deducted from taxable capital gainsrealized by the Holder in such year. Allowable capital losses not deducted in the taxation year in which theyare realized may generally be carried back to any of the three precedingtaxation years or carried forward to any future taxation year and deductedagainst net taxable capital gains realized in such years, to the extent andunder the circumstances described in the ITA.

 

The amount of any capital loss realized by a Holderthat is a corporation on the disposition of a Share may be reduced by theamount of dividends received or deemed to be received by it on such Share tothe extent and under the circumstances prescribed by the ITA.  Similar rules apply to a partnership ortrust of which a corporation, trust or partnership is a member or beneficiary.

 

A Canadian Holder that is a Canadian-controlledprivate corporation throughout the year (as defined in the ITA) may be liableto pay an additional refundable tax of 6 2/3% on any taxable capital gains.

 

123

----

 

Capital gains realized by an individual or certaintrusts may give rise to a liability for alternative minimum tax.

 

**Documents on Display**

 

We are subject tothe information requirements of the U.S. Securities Exchange Act of 1934, asamended.  In accordance with theserequirements, we file reports and other information with the United StatesSecurities and Exchange Commission.  Thesematerials, including this Annual Report (Form 20-F) and the exhibits thereto,may be inspected and copied at the Commission’s Public Reference Room at100 F Street, N.E., Washington, D.C. 20549 and at the Commission’s regionaloffices at 500 West Madison Street, Suite 1400, Chicago, Illinois60661.  Copies of the materials may beobtained from the Public Reference Room of the Commission at 100 F Street,N.E., Washington, D.C. 20549 at prescribed rates.  The public may obtain information on theoperation of the Commission’s Public Reference Room by calling theCommission in the United States at 1-800-SEC-0330.  The Commission also maintains a website atwww.sec.gov that contains reports, proxy statements and other informationregarding registrants that file electronically with the Commission.  The Company’s annual reports and some of theother information submitted by the Company to the Commission may be accessedthrough this website.  In addition,material filed by the Company can be inspected at the offices of the NASDAQ at9801 Washingtonian Blvd., Gaithersburg, MD 20878, and on the CanadianSecurities Administrators’ electronic filing system, SEDAR, accessible at thewebsite www.sedar.com.  This materialincludes the Company’s Management Information Circular for its annual meetingto be held on May 15, 2008, which provides information includingdirectors’ and officers’, remuneration and indebtedness, principal holders ofsecurities and securities authorized for issuance under equity compensationplans.  Additional financial informationis provided in our annual financial statements for the year ended December 31,2007 and our Management’s Discussion and Analysis relating to thesestatements.  These documents are alsoaccessible on SEDAR (www.sedar.com).

 

**Item 11.                 Quantitative and QualitativeDisclosures About Market Risk**

 

**Market Risk**

 

We are exposed to financial market risks, includingchanges in foreign currency exchange rates and interest rates oninvestments.  We do not use derivativefinancial instruments for speculative or trading purposes.

 

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

 

**Foreign Currency Risk**

 

Our reporting currency is the U.S. dollar.  The functional currency for our Canadianoperations, which includes the radiopharmaceutical segment, contractmanufacturing segment and royalties and milestones related to product rightssold to Shire, is the Canadian dollar. Accordingly, our foreign exchange exposure for accounting purposesmainly relates to U.S.-denominated monetary assets of these operations.  We do not currently use derivative instrumentsto hedge our foreign exchange risk and currently have no plans to do so in thenear future.  For fiscal year 2007, U.S.dollar revenue accounted for approximately 51% of the Company’s revenue.  During this same period, the value of theCanadian dollar versus the U.S. dollar strengthened by 18% from January 1,2007 to December 31, 2007.  As aresult, in 2007 we had to charge to income $1.7 million of foreign exchangeloss related to the strengthening of the Canadian dollar.  See “Risk Factors — Risks Related to OurCompany — We are Exposed to Exchange Rate Fluctuations which could NegativelyAffect our Business”.

 

124

----

 

**Interest Rate Risk**

 

Theprimary objective of our investment policy is the protection of principal, andaccordingly we invest in high-grade commercial paper and government securitieswith varying maturities, but typically less than 90 days.  As it is our intent and policy to hold theseinvestments until maturity, we believe we do not have a material exposure tointerest rate risk.

 

We currently have no outstanding third party debt, but we do haveaccess to undrawn credit facilities with variable interest rates.  Should we borrow in the future on ourexisting facilities, any material changes to interest rates could result inmaterially increased interest expense and decreased results of operations.

 

**Item 12.                 Description of Securities Other Than EquitySecurities**

 

Not Applicable

 

**PART II.**

 

**Item 13.                 Defaults, Dividends Arrearages and Delinquencies**

 

None

 

**Item 14.                 Material Modifications to the Rights of SecurityHolders and Use of Proceeds**

 

None

 

**Item 15                  Controls and Procedures**

 

A.                                   Disclosure Controls and Procedures

 

As at the end ofthe period covered by this report, our Chief Executive Officer and our ChiefFinancial Officer, together with members of our senior management, have carriedout an evaluation of the effectiveness of the design and operation of ourdisclosure controls and procedures. These are defined (in Rule 13a-15(e) or 15d-15(e) underthe Securities Exchange Act of 1934, as amended) as those controls andprocedures designed to ensure that information required to be disclosed inreports filed under the United States Securities Exchange Act of 1934, asamended, is recorded, processed, summarized and reported within specified timeperiods.  As of the date of theevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat the design and operation of these disclosure controls and procedures wereeffective to provide reasonable assurance that information required to bedisclosed by us in the reports that we file or submit under the United StatesSecurities Exchange Act of 1934, as amended, is recorded, processed, summarizedand reported, within the time periods specified in the applicable rules andforms, and that it is accumulated and communicated to our management, includingour Chief Executive Officer and Chief Financial Officer, as appropriate toallow timely decisions regarding required disclosures.

 

B.                                     Management’s AnnualReport on Internal Control over Financial Reporting

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting for the Company. Internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof our financial reporting for external purposes in accordance with accountingprinciples generally accepted in the United States of America. Internal controlover financial reporting includes maintaining records that in reasonable detailaccurately and fairly reflect the transactions and disposition of our assets;providing reasonable assurance that 

 

125

----

 

transactions are recorded as necessary for preparation of our financialstatements; providing reasonable assurance that receipts and expenditures ofthe Company are made in accordance with management authorization; and providingreasonable assurance that unauthorized acquisition, use or disposition ofCompany assets that could have a material effect on our financial statementswould be prevented or detected on a timely basis. Because of its inherentlimitations, internal control over financial reporting is not intended toprovide absolute assurance that a misstatement of our financial statementswould be prevented or detected.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Managementconducted an evaluation of the effectiveness of our internal control overfinancial reporting based on the framework in *InternalControl - Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on this evaluation, managementconcluded that the Company’s internal control over financial reporting waseffective as of December 31, 2007.

 

There was nochange during the fiscal year ended December 31, 2007 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

Deloitte &Touche LLP, Independent Registered Chartered Accountants, have issued an auditopinion on the effectiveness of the Company’s internal control over financialreporting as of December 31, 2007, as stated in their report appearingbelow.

 

C.                                     Attestation Report of the RegisteredPublic Accounting Firm

 

## **To theShareholders and Board of Directors of DRAXIS Health Inc.**

## ** **

We haveaudited the internal control over financial reporting of DRAXIS Health Inc. andsubsidiaries (the “Company”) as of December 31, 2007, based on thecriteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting, included in the accompanying Management’s Report on Internal Controlover Financial Reporting. Our responsibility is to express an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in allmaterial respects. Our audit included obtaining an understanding of internalcontrol over financial reporting, assessing the risk that a material weaknessexists, testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed by,or under the supervision of, the company’s principal executive and principalfinancial officers, or persons performing similar functions, and effected bythe company’s board of directors, management, and other personnel to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain 

 

126

----

 

to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

 

Becauseof the inherent limitations of internal control over financial reporting,including the possibility of collusion or improper management override ofcontrols, material misstatements due to error or fraud may not be prevented ordetected on a timely basis. Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to futureperiods are subject to the risk that the controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

In ouropinion, the Company maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2007, based on thecriteria established in *Internal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

We havealso audited, in accordance with Canadian generally accepted auditing standardsand with the standards of the Public Company Accounting Oversight Board (UnitedStates), the consolidated financial statements as of and for the year ended December 31,2007 of the Company and our report dated February 22, 2008 expressed anunqualified opinion on those financial statements and included a separatereport titled *Comments by Independent Registered CharteredAccountants on Canada-United States of America Reporting Differences*referring to changes in accounting principles.

 

DELOITTE & TOUCHE LLPMontréal, Québec, February 22, 2008

 

This report is included in theFinancial Statements under “Report of Independent Registered CharteredAccountants” on Page F-3.

 

D.                                    Changes in Internal Control OverFinancial Reporting

 

There haveoccurred no changes in our internal control over financial reporting (asdefined in Rule 13a-15 or 15d-15 under the Exchange Act) during the periodcovered by this Annual Report (Form 20-F) that have materially affected,or are reasonably likely to materially affect, our internal control overfinancial reporting.

 

The informationfurnished pursuant to Item 15T of this Annual Report (Form 20-F) shall notbe deemed “filed” for purposes of the Securities Exchange Act of 1934, asamended, nor shall it be incorporated by reference into any of the Company’sfilings under the Securities Act of 1933, as amended, unless otherwiseexpressly stated in such filing.

 

**Item 16A.**              **Audit Committee Financial Expert**

 

127

----

 

The Company’sBoard of Directors has determined that Mr. Rolf Henel, a member of theCompany’s Audit Committee, is a financial expert.  Mr. Henel is an independent directorunder each of definitions of such terms under the applicable Canadian, TSX,U.S. and NASDAQ rules.

 

**Item 16B.              Code of Ethics and Business Conduct**

 

In April 2004, we amended our existing Code of Ethics, whichresulted in the establishment of a new Code of Ethics and Business Conduct (the“Code”) in light of our continued commitment to honesty and integrity in theconduct of its business.  The Codeapplies to all our directors, officers and employees, including our ChiefExecutive Officer, our Chief Financial Officer and all employees of oursubsidiaries.  The Code is available onour website at www.draxis.com and was filed on SEDAR (www.sedar.com) on August 31,2005.  In addition, upon written request,we can provide a copy of the Code.

 

In accordance with the terms of the Code, the Audit Committee receivesquarterly reports from the Director of Human Resources on any concerns raisedregarding accounting, internal accounting controls and auditing matters.  The Board of Directors monitors compliancewith the Code by receiving quarterly reports from the Audit Committee regardingany concerns raised.  Complaints receivedby any officer concerning any violation of the Code are brought to theattention of the Board of Directors.  TheCode is distributed and signed by each of the Company’s employees when they arehired and it is available on the Company’s intranet and in each employeehandbook.  Information sessions are givento employees on the contents and application of the Code.

 

If we amend any provisions of our Code or if we grant any waiver ofsuch provisions, we will disclose such amendment or waiver on our web site atthe same address www.draxis.com.

 

**Item 16C.              Principal Accountant Fees and Services**

 

In accordance with the Audit Committee Charter, the Audit Committeepre-approves all auditing services and permitted non-audit services (includingfees and terms thereof) to be performed for the Company or its subsidiaries byits Independent Registered Chartered Accountants.  All the services of Deloitte &Touche LLP rendered in 2007 were pre-approved by the Audit Committee.

 

Deloitte & Touche LLP, Independent Registered CharteredAccountants (“Company’s auditor” or “Company’s principal accountant”) hasserved as our Independent Registered Chartered Accountants for each of thefiscal years in the three-year period ended December 31, 2007, for whichaudited financial statements appear in this Annual Report (Form 20-F).

 

**2007 Audit Fees**

 

The fees for all audit services performed by the Company’s auditor and itssubsidiaries for the year ended December 31, 2007 were CDN$446,100.Services provided include the audit of the Company’s consolidated financialstatements, review of the notes to the annual report to shareholders,management proxy circular, quarterly reviews, this Annual Report (Form 20-F)and attestation of the effectiveness of the Company’s internal control overfinancial reporting.  No hours were expendedin the audit of our financial statements by persons other than the Company’sprincipal accountant.

 

**2007 Audit-RelatedFees**

 

The aggregate fees billed for the year ended December 31, 2007 forassurance and related services by the Company’s auditor that are reasonablyrelated to the performance of the audit or review of the Company’s financialstatements were CDN$Nil.

 

128

----

 

**2007 Tax Fees**

 

The aggregate fees billed for the year ended December 31, 2007 forprofessional services rendered by the Company’s auditor for tax compliance, taxadvice and tax planning were CDN$42,810.

 

**2007 All Other Fees**

 

The aggregate fees billed for the year ended December 31, 2007 forproducts and services provided by the Company’s auditor, other than thosedescribed above, were CDN$Nil.

 

**2006 Audit Fees**

 

The fees for all audit services performed by the Company’s auditor and itssubsidiaries for the year ended December 31, 2006 were CDN$315,500.Services provided include the audit of the Company’s consolidated financialstatements, review of the notes to the annual report to shareholders,management proxy circular, quarterly reviews and this Annual Report (Form 20-F).  No hours were expended in the audit of ourfinancial statements by persons other than the Company’s principal accountant.

 

**2006 Audit-RelatedFees**

 

The aggregate fees billed for the year ended December 31, 2006 forassurance and related services by the Company’s auditor that are reasonablyrelated to the performance of the audit or review of the Company’s financialstatements were CDN$Nil.

 

**2006 Tax Fees**

 

The aggregate fees billed for the year ended December 31, 2006 forprofessional services rendered by the Company’s auditor for tax compliance, taxadvice and tax planning were CDN$39,750.

 

**2006 All Other Fees**

 

The aggregate fees billed for the year ended December 31, 2006 forproducts and services provided by the Company’s auditor, other than thosedescribed above, were $Nil.

 

**Interest of Auditors**

 

Deloitte &Touche LLP are the Independent Registered Chartered Accountants of the Companyand are independent within the meaning of the Code of Ethics of the Ordre descomptables agréés du Québec, and of the Securities Act of 1933 and theapplicable rules and regulations thereunder adopted by the Securities andExchange Commission (“SEC”) and the Public Company Accounting Oversight Board(United States).

 

**Item 16D.              Exemptions from the Listing Standards for AuditCommittees**

 

                Notapplicable.

 

**Item 16E.               Purchases of Equity Securities by the Issuer andAffiliated Purchasers**

 

On November 1, 2006,the Board of Directors authorized the purchase of up to 10% of the public floatof the Company’s common shares through a Normal Course Issuer Bid (the “2006Issuer Bid”) to be commenced on December 20, 2006.  Pursuant to the acceptance by the TSX, on December 18,2006, of 

 

129

----

 

the Notice of Intention tomake the 2006 Issuer Bid, the Company was authorized to purchase on the openmarket through the facilities of the Toronto Stock Exchange up to 3,397,011common shares for cancellation, representing 10% of the 33,970,112 commonshares in the public float as at December 14, 2006.  The Company purchased 130,100 common sharesunder the 2006 Issuer Bid, which terminated on December 19, 2007.

 

On January 7, 2008, theBoard of Directors authorized the purchase of up to 10% of the public float ofthe Company’s common shares through a Normal Course Issuer Bid (the “2008Issuer Bid”) to be commenced on January 21, 2008.  The 2008 Issuer Bid enables the Company topurchase on the open market through the facilities of the Toronto StockExchange up to 4,072,054 common shares for cancellation, representing 10% ofthe 40,720,539 common shares in the public float as at January 14,2008.  Pursuant to the acceptance by theToronto Stock Exchange, on January 16, 2008, of the Notice of Intention tomake a Normal Course Issuer Bid, the Company was authorized to purchase commonshares under the 2008 Issuer Bid commencing on January 21, 2008 until January 20,2009, or until such earlier date when the Company purchases the maximumallowable number of shares or elects to terminate the 2008 Issuer Bid.  Subject to any block purchases made inaccordance with the rules of the Toronto Stock Exchange, the Company issubject to a daily repurchase restriction of 23,084 common shares, whichrepresents 25% of the average daily trading volume of the Company’s commonshares on the Toronto Stock Exchange for the six (6) months ended December 31,2007.  As of March 18, 2008, theCompany had not purchased any common shares under the 2008 Issuer Bid.

 

130

----

 

 

**ISSUER PURCHASES OF EQUITYSECURITIES**

 

**2006 IssuerBid**

 
| ** **          | ** ** | ** **                | ** ** | ** **                 | ** ** | ** **                   | ** ** | **(d) Maximum**     | ** ** |
|---------------------|------------|---------------------------|------------|----------------------------|------------|------------------------------|------------|--------------------------|------------|
| ** **          | ** ** | ** **                | ** ** | ** **                 | ** ** | ** **                   | ** ** | **Number (or**           | ** ** |
| ** **          | ** ** | ** **                | ** ** | ** **                 | ** ** | ** **                   | ** ** | **Approximate**          | ** ** |
| ** **          | ** ** | ** **                | ** ** | ** **                 | ** ** | **(c) Total Number**    | ** ** | **Dollar Value) of**     | ** ** |
| ** **          | ** ** | ** **                | ** ** | ** **                 | ** ** | **of Shares (or**            | ** ** | **Shares (or Units)**    | ** ** |
| ** **          | ** ** | ** **                | ** ** | ** **                 | ** ** | **Units) Purchased**         | ** ** | **that May Yet Be** | ** ** |
| ** **          | ** ** | **(a) Total Number** | ** ** | **(b) Average Price** | ** ** | **as Part of Publicly** | ** ** | **Purchased Under**      | ** ** |
| ** **          | ** ** | **of Shares (Or**         | ** ** | **Paid per Share (or**     | ** ** | **Announced Plans**          | ** ** | **the Plans or**         | ** ** |
| **Period**          | ** ** | **Units) Purchased**      | ** ** | **Units)**                 | ** ** | **or Programs**              | ** ** | **Programs**             | ** ** |
| ** **          | ** ** | ** **                | ** ** | ** **                 | ** ** | ** **                   | ** ** | ** **               | ** ** |
| December 2006  |       | —                    |       | —                     |       | —                       |       | 3,397,011                |       |
| January 2007   |       | —                    |       | —                     |       | —                       |       | 3,397,011                |       |
| February 2007  |       | —                    |       | —                     |       | —                       |       | 3,397,011                |       |
| March 2007     |       | —                    |       | —                     |       | —                       |       | 3,397,011                |       |
| April 2007     |       | —                    |       | —                     |       | —                       |       | 3,397,011                |       |
| May 2007       |       | —                    |       | —                     |       | —                       |       | 3,397,011                |       |
| June 2007      |       | —                    |       | —                     |       | —                       |       | 3,397,011                |       |
| July 2007      |       | —                    |       | —                     |       | —                       |       | 3,397,011                |       |
| August 2007    |       | —                    |       | —                     |       | —                       |       | 3,397,011                |       |
| September 2007 |       | 12,400                    |       | $5.15 (CDN$5.16)           |       | 12,400                       |       | 3,384,611                |       |
| October 2007   |       | 117,700                   |       | $5.28 (CDN$5.21)           |       | 130,100                      |       | 3,266,911                |       |
| November 2007  |       | —                    |       | —                     |       | 130,100                      |       | 3,266,911                |       |
| December 2007  |       | —                    |       | —                     |       | 130,100                      |       | 3,266,911                |       |
| Total               |       | 130,100                   |       | $5.27 (CDN$5.21)           |       | 130,100                      |       | 3,266,911                |       |

 

 

131

----

 

**2008 IssuerBid**

 
| **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 2008                                        |       | —                                                       |       | —                                                   |       | —                                                                                                                |       | 4,072,054                                                                                                                                                    |       |
| February 2008                                       |       | —                                                       |       | —                                                   |       | —                                                                                                                |       | 4,072,054                                                                                                                                                    |       |
| March 2008 (up to March 18, 2008  inclusively) |       | —                                                       |       | —                                                   |       | —                                                                                                                |       | 4,072,054                                                                                                                                                    |       |
| Total                                                    |       | —                                                       |       | —                                                   |       | —                                                                                                                |       | 4,072,054                                                                                                                                                    |       |

 

 

**PART III.**

 

**Item 17.         Financial Statements**

 

Not Applicable.

 

**Item 18.         Financial Statements**

 
| The following financial statements are filed as part  of this Annual Report (Form 20-F). |   |   |
|-----------------------------------------------------------------------------------------------|--------|--------|
| Management’s Report                                                                      |   | F-1    |
| Management’s Report on  Internal Control over Financial Reporting                        |   | F-2    |
| Reports  of Independent Registered Chartered Accountants                                      |   | F-3    |
| Consolidated Statements  of Operations                                                        |   | F-5    |
| Consolidated Balance  Sheets                                                                  |   | F-6    |
| Consolidated Statements  of Changes in Equity and Comprehensive Income (Loss)                 |   | F-7    |
| Consolidated Statements  of Cash Flows                                                        |   | F-8    |
| Notes to the  Consolidated Financial Statements                                               |   | F-9    |

 

132

----

 

**Item 19.         Exhibits**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 1.1                  |       | Articles of  Amalgamation of DRAXIS Health Inc. (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31,  2000, filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                                                                                                         |
| 1.2                  |       | By-law No. 1 of  DRAXIS Health Inc. (formerly Deprenyl Research Limited) (incorporated herein  by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2000, filed on June 29, 2001 (SEC file no.  000-17434))                                                                                                                                                                                                                                                                                          |
| 4.1                  |       | Master Agreement dated  November 12, 1997 among DRAXIS Health Inc., Deprenyl Animal Health Inc.  and Pfizer Inc. (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2000, filed on  June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                                   |
| 4.2                  |       | License Agreement dated  November 12, 1997 between Deprenyl Animal Health Inc. and Pfizer Inc.  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on  June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                                                    |
| 4.3                  |       | Letter Agreement dated  December 22, 1999 between DRAXIS Health Inc., Deprenyl Animal Health  Inc. and Pfizer Inc. (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                                 |
| 4.4                  |       | Second Amendment dated  December 18, 2001 to the Master Agreement, as amended December 22,  1999, License Agreement, Research Agreement, U.S. and Canada Manufacturing  and Supply Agreement and International Manufacturing and Supply Agreement  between Pfizer Inc., Deprenyl Animal Health, Inc. and DRAXIS Health Inc.  dated November 12, 1997 (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31,  2001, filed on May 20, 2002 (SEC file no. 000-17434)) |
| 4.5                  |       | Amending Agreement  dated March 31, 2003 between DRAXIS Health, Inc., Elan Pharma  International Limited and Elan Pharmaceuticals, Inc. (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the  year ended December 31, 2002, filed on May 14, 2003 (SEC file no.  000-17434))                                                                                                                                                                                                                  |
| 4.6                  |       | First  Amendment to Subscription Agreement dated October 24, 2002 among SGF  Santé Inc., DRAXIS Health Inc. and DRAXIS Pharma Inc. (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2002, filed on May 14, 2003 (SEC file no. 000-17434))                                                                                                                                                                                                                             |
| 4.7                  |       | Share Purchase  Agreement dated April 22, 2004 between DRAXIS Health Inc. and SGF Santé  Inc. (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on  May 14, 2004 (SEC file No. 000-17434))                                                                                                                                                                                                                                                             |
| 4.8                  |       | Share Purchase  Agreement dated July 16, 2003 between Mohammed Barkat and DRAXIS Pharma  Inc. (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on  May 14, 2004 (SEC file No. 000-17434))                                                                                                                                                                                                                                                                  |
| 4.9                  |       | Share Purchase  Agreement dated July 16, 2003 between Michel Sauvageau and DRAXIS Pharma  Inc. (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on  May 14, 2004 (SEC file No. 000-17434))                                                                                                                                                                                                                                                                 |

 

133

----

 
| 4.10       |   | Term Loan Agreement  dated June 9, 1998 between National Bank of Canada and DRAXIS Pharma  Inc. (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on  June 29, 2001 (SEC file no. 000-17434))                                         |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.11       |   | Credit Agreement dated  February 18, 2000 between National Bank of Canada and DRAXIS Pharma Inc.  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on  June 29, 2001 (SEC file no. 000-17434))                                       |
| 4.12       |   | Underwriting Agreement  dated April 2, 2004 between DRAXIS Health Inc., Desjardins Securities  Inc. and CIBC World Markets Inc. (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31,  2003, filed on May 14, 2004 (SEC file No. 000-17434))     |
| 4.13† |   | Asset  Purchase Agreement dated July 22, 2003 between DRAXIS Health Inc. and  Shire Biochem Inc. (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2003, filed on  May 14, 2004 (SEC file No. 000-17434))                                    |
| 4.14       |   | Stock Option Plan of  DRAXIS Health Inc., as amended, dated June 27, 2001 (incorporated herein  by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2003, filed on May 14, 2004 (SEC file  No. 000-17434))                                                          |
| 4.15       |   | DRAXIS Health Inc.  Employee Stock Ownership Plan, amended and restated, effective  December 1, 1998 (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434))                                    |
| 4.16       |   | DRAXIS Health Inc.  Employee Participation Share Purchase Plan, effective February 16, 1995  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on  June 29, 2001 (SEC file no. 000-17434))                                            |
| 4.17       |   | DRAXIS Health Inc.  Deferred Share Unit Plan for Employees (incorporated herein by reference to  the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                                                                                   |
| 4.18       |   | DRAXIS Health Inc.  Equity Purchase Plan (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                     |
| 4.19       |   | DRAXIS Retirement  Savings Program (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2002, filed on  May 14, 2003 (SEC file no. 000-17434))                                                                                                            |
| 4.20       |   | Shareholder Rights Plan  Agreement dated April 23, 2002 between DRAXIS Health Inc. and  Computershare Trust Company of Canada as trustee (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2001, filed on May 20, 2002 (SEC file no. 000-17434)) |
| 4.21       |   | Employment Agreement  dated April 15, 1999 between DRAXIS Health Inc. and Dr. Martin  Barkin (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on  June 29, 2001 (SEC file no. 000-17434))                                       |
| 4.22       |   | Amendment dated  June 14, 2000 to Employment Agreement dated April 15, 1999 between  DRAXIS Health Inc. and Dr. Martin Barkin (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434)) |

 

134

----

 
| 4.23 |   | Retirement Compensation  Agreement dated September 24, 2003 between DRAXIS Health Inc. and  Dr. Martin Barkin (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2003,  filed on May 14, 2004 (SEC file No. 000-17434))                   |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.24 |   | Employment Agreement  dated April 27, 2004 between DRAXIS Health Inc. and Dan Brazier  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on  May 14, 2004 (SEC file No. 000-17434))                                               |
| 4.25 |   | Employment Agreement  dated October 18, 2000 between DRAXIS Health Inc. and Jack A. Carter  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on  June 29, 2001 (SEC file no. 000-17434))                                              |
| 4.26 |   | Amendment dated  March 26, 2004 to Employment Agreement dated October 18, 2000  between DRAXIS Health Inc. and Jack A. Carter (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file  No. 000-17434))  |
| 4.27 |   | Employment Agreement  dated April 22, 2003 between DRAXIS PHARMA Inc. and John E.M. Durham  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on  May 14, 2004 (SEC file No. 000-17434))                                          |
| 4.28 |   | Amendment dated  March 26, 2004 to Employment Agreement dated April 22, 2003 between  DRAXIS PHARMA Inc. and John E.M. Durham (incorporated herein by reference to  the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file  No. 000-17434))  |
| 4.29 |   | Employment Agreement  dated October 17, 2003 between DRAXIS Health Inc. and Alida Gualtieri  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on  May 14, 2004 (SEC file No. 000-17434))                                         |
| 4.30 |   | Amendment dated  March 26, 2004 to Employment Agreement dated October 17, 2003  between DRAXIS Health Inc. and Alida Gualtieri (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file  No. 000-17434)) |
| 4.31 |   | Employment Agreement  dated March 9, 2004 between DRAXIS Health Inc. and Chien Huang  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on  May 14, 2004 (SEC file No. 000-17434))                                                |
| 4.32 |   | Employment Agreement  dated March 9, 2004 between DRAXIS Health Inc. and Mark Oleksiw  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on  May 14, 2004 (SEC file No. 000-17434))                                               |
| 4.33 |   | Employment Agreement  dated May 14, 2001 between DRAXIS Health Inc. and Jerry Ormiston  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2001, filed on  May 20, 2002 (SEC file no. 000-17434))                                                   |
| 4.34 |   | Amendment dated  March 26, 2004 to Employment Agreement dated May 14, 2001 between  DRAXIS Health Inc. and Jerry Ormiston (incorporated herein by reference to  the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file  No. 000-17434))      |

 

135

----

 
| 4.35       |   | Employment Agreement  dated October 1, 1997 between DRAXIS Health Inc. and Dr. Richard J.  Flanagan (incorporated herein by reference to the Company’s Annual Report (Form 20-F)  for the year ended December 31, 2003, filed on May 14, 2004 (SEC  file No. 000-17434))                                                                                                                                                                            |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.36       |   | Amendment dated  July 23, 2001 to Employment Agreement dated October 1, 1997 between  DRAXIS Health Inc. and Dr. Richard J. Flanagan (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file  No. 000-17434))                                                                                                                                     |
| 4.37† |   | Non Exclusive  Distribution Agreement dated October 25, 1995 between Frosst  Radiopharmaceuticals, a division of Merck Frosst Canada Inc. (now known as  DRAXIMAGE) and Syncor International Corporation (now known as Cardinal Health  414, LLC) (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2004, filed on March 31,  2005 (SEC file No. 000-17434))                                 |
| 4.38† |   | Non Exclusive  Distribution Agreement dated July 12, 2000 between DRAXIMAGE and Syncor  International (now known as Cardinal Health 414, LLC) (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2004, filed on March 31, 2005 (SEC file  No. 000-17434))                                                                                                                                    |
| 4.39† |   | Amendment dated  August 6, 2003 to Non Exclusive Distribution Agreement dated  July 12, 2000 between DRAXIMAGE and Syncor International (now known as  Cardinal Health 414, LLC) (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2004,  filed on March 31, 2005 (SEC file No. 000-17434))                                                                                             |
| 4.40† |   | Manufacturing and  Supply Agreement dated July 1, 1999 between Warner-Lambert Canada Inc.  (now known as Pfizer Consumer Healthcare, a Division of Pfizer Canada Inc.)  and DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a division of DRAXIS  Specialty Pharmaceuticals Inc.) (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2004,  filed on March 31, 2005 (SEC file No. 000-17434)) |
| 4.41† |   | Supply Agreement dated  December 18, 2001 between GlaxoSmithKline Inc. and DRAXIS Pharma Inc.  (now known as DRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals  Inc.) (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2004, filed on  March 31, 2005 (SEC file No. 000-17434))                                                                                                 |
| 4.42† |   | Manufacture and Supply  Agreement entered into between DRAXIS Pharma Inc. (now known as DRAXIS  Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.) and Bone Care  International, Inc. on March 3, 2003 (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2004, filed on March 31, 2005 (SEC file  No. 000-17434))                                                            |
| 4.43       |   | Amendment dated  August 25, 2004 to Employment Agreement dated April 27, 2004  between DRAXIS Health Inc. and Dan Brazier (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2004, filed on March 31, 2005 (SEC file  No. 000-17434))                                                                                                                                                   |
| 4.44       |   | Amended and Restated  Loan Agreement dated June 10, 2004 between DRAXIS Health Inc. and  National Bank of Canada (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2004,  filed on March 31, 2005 (SEC file No. 000-17434))                                                                                                                                                                  |

 

136

----

 
| 4.45       |   | Amendment dated  June 23, 2004 to Employment Agreement dated April 15, 1999 between  DRAXIS Health Inc. and Martin Barkin (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31,  2004, filed on March 31, 2005 (SEC file No. 000-17434))                                                         |
|------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.46       |   | Amendment to Credit  Facilities for DRAXIS Pharma Inc. dated March 28, 2002 between National  Bank of Canada and DRAXIS Pharma Inc. (incorporated herein by reference to  the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2001, filed on May 20, 2002 (SEC file  No. 000-17434))                                                     |
| 4.47       |   | Loan Agreement dated  March 28, 2002 among DRAXIS Pharma Inc., SGF Santé Inc. and DRAXIS  Health Inc. (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2001, filed on  May 20, 2002 (SEC file No. 000-17434))                                                                               |
| 4.48       |   | Loan Agreement dated  March 28, 2002 among DRAXIS Pharma Inc., Investissement Québec and  DRAXIS Health Inc. (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2001, filed on  May 20, 2002 (SEC file No. 000-17434))                                                                        |
| 4.49       |   | First Amendment to  Subscription Agreement dated October 24, 2002 among SGF Santé Inc.,  DRAXIS Health Inc. and DRAXIS Pharma Inc. (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2002, filed on May 14, 2003 (SEC file  No. 000-17434))                                                 |
| 4.50† |   | Manufacturing and Supply Master Agreement, dated January 1, 2005,  between Pfizer Canada Inc. and DRAXIS Pharma, a division of DRAXIS Specialty  Pharmaceuticals Inc. (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the  year ended December 31, 2005, filed on March 31, 2006 (SEC file  No. 000-17434))                 |
| 4.51† |   | Amendment, dated December 20, 2005, to Employment Agreement dated  April 27, 2004, as amended between DRAXIS Health Inc. and Dan Brazier,  Chief Operating Officer of the Company (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2005,  filed on March 31, 2006 (SEC file No. 000-17434)) |
| 4.52† |   | Employment Agreement, dated April 22, 2005, between DRAXIS Health  Inc. and Mr. Jean-Pierre Robert, President of DRAXIMAGE, a division of  DRAXIS Specialty Pharmaceuticals Inc. (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2005,  filed on March 31, 2006 (SEC file No. 000-17434))  |
| 4.53† |   | Retirement Compensation Arrangement Trust  Agreement, dated July 8, 2005, between DRAXIS Health Inc. and  Dr. Richard Flanagan (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2005, filed on  March 31, 2006 (SEC file No. 000-17434))                                                    |
| 4.54       |   | Charter of the Board of  Directors adopted in April 2004 (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31,  2005, filed on March 31, 2006 (SEC file No. 000-17434))                                                                                                                               |
| 4.55       |   | Charter of the Audit  Committee amended in May 2005 (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31,  2005, filed on March 31, 2006 (SEC file No. 000-17434))                                                                                                                                    |
| 4.56       |   | Charter of the Human  Resources and Compensation Committee amended in May 2005 (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the  year ended December 31, 2005, filed on March 31, 2006 (SEC file  No. 000-17434))                                                                                                        |

 

137

----

 
| 4.57        |   | Charter of the  Nominating and Corporate Governance Committee amended in May 2005  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2005, filed on  March 31, 2006 (SEC file No. 000-17434)) |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.58        |   | 2006  Stock Option Plan (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the  year ended December 31, 2006, filed on March 30, 2007 (SEC file  No. 000-17434))                                                                |
| 4.59        |   | Terms of reference of  the Non Executive Chair (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2006,  filed on March 30, 2007 (SEC file No. 000-17434))                                          |
| 4.60        |   | Terms of reference of  the Committee Chairs (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2006,  filed on March 30, 2007 (SEC file No. 000-17434))                                             |
| 4.61        |   | Terms of reference for  the CEO (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2006, filed on  March 30, 2007 (SEC file No. 000-17434))                                                         |
| 4.62        |   | Charter of the Audit  Committee as amended in February 2007 (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2006, filed on March 30, 2007 (SEC file  No. 000-17434))                       |
| 4.63*       |   | Amended 2006 Stock  Option Plan                                                                                                                                                                                                                                                         |
| 4.64*       |   | Amended Stock Option  Plan of DRAXIS Health Inc.                                                                                                                                                                                                                                        |
| 4.65*       |   | Amended Deferred Share  Unit Plan                                                                                                                                                                                                                                                       |
| 4.66*       |   | Amended terms of  reference of the Non Executive Chair                                                                                                                                                                                                                                  |
| 4.67*       |   | Amended terms of  reference for the CEO                                                                                                                                                                                                                                                 |
| 4.68†* |   | Manufacture and Supply  Agreement dated September 4, 2007 among DRAXIS Pharma, a division of  DRAXIS Specialty Pharmaceuticals Inc. and Johnson & Johnson Consumer  Companies, Inc.                                                                                  |
| 4.69†* |   | Credit Agreement dated  September 4, 2007 among DRAXIS Pharma, a division of DRAXIS Specialty  Pharmaceuticals Inc. and Johnson & Johnson Finance Corporation                                                                                                             |
| 4.70†* |   | Distribution Agreement  dated December 20, 2007 among DRAXIMAGE LLC and Medi-Physics doing  business as GE Healthcare                                                                                                                                                              |
| 4.71†* |   | Amendment dated  January 31, 2008, to Employment Agreement dated October 17, 2003,  as amended between DRAXIS Health Inc. and Alida Gualtieri, General  Counsel & Secretary of the Company                                                                           |
| 4.72†* |   | Amendment dated  January 31, 2008, to Employment Agreement dated March 9, 2004, as  amended between DRAXIS Health Inc. and Mark Oleksiw, Chief Financial Officer  of the Company                                                                                              |
| 4.73†* |   | Amendment dated  January 31, 2008, to Employment Agreement dated May 15, 2001, as  amended between DRAXIS Health Inc. and Jerry Ormiston, Executive Director,  Investor Relations of the Company                                                                              |
| 4.74†* |   | Employment Agreement,  dated February 7, 2008, between DRAXIS Health Inc. and Dan Brazier,  President & CEO of the Company                                                                                                                                                |
| 4.75†* |   | Employment Agreement,  dated March 3, 2008, between DRAXIS Health Inc. and Jean-Pierre Robert,  Chief Operating Officer of the Company and President of DRAXIS Specialty  Pharmaceuticals Inc.                                                                                     |
| 4.76†* |   | Amendment dated  March 6, 2008, to Employment Agreement dated October 17, 2003, as  amended between DRAXIS Health Inc. and Alida Gualtieri, General  Counsel & Secretary of the Company                                                                              |
| 8.1*        |   | List of Subsidiaries                                                                                                                                                                                                                                                                    |
| 12.1*       |   | Certification of CEO  required by Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                    |

 

138

----

 
| 12.2* |   | Certification of CFO  required by Section 302 of the Sarbanes-Oxley Act of 2002 |
|-------|--------|--------------------------------------------------------------------------------------|
| 13.1* |   | Certification of CEO  required by Section 906 of the Sarbanes-Oxley Act of 2002 |
| 13.2* |   | Certification of CFO  required by Section 906 of the Sarbanes-Oxley Act of 2002 |

----

* Filed herewith

† Portions of theexhibits have been omitted pursuant to a confidential treatment request. Thisinformation has been filed separately with the Securities and ExchangeCommission.

 

SIGNATURES

 

The registrant hereby certifies that it meetsall of the requirements for filing on Form 20-F and that it has dulycaused and authorized the undersigned to sign this annual report on its behalf.

 

DRAXIS HEALTH INC.

 
| Date:  March 31, 2008 | By:    | /s/  MARK OLEKSIW                      |
|----------------------------|--------|----------------------------------------|
|                       |   | Chief  Financial Officer               |
|                       |   |
|                       |   |
|                       | By:    | /s/  DAN BRAZIER                       |
|                       |   | President and Chief  Executive Officer |

 

139

----

EXHIBIT INDEX

DRAXIS HEALTH INC.

Form 20-F AnnualReport

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|----------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 1.1                  |       | Articles of  Amalgamation of DRAXIS Health Inc. (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31,  2000, filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                                                                                                         |
| 1.2                  |       | By-law No. 1 of  DRAXIS Health Inc. (formerly Deprenyl Research Limited) (incorporated herein  by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2000, filed on June 29, 2001 (SEC file no.  000-17434))                                                                                                                                                                                                                                                                                          |
| 4.1                  |       | Master Agreement dated  November 12, 1997 among DRAXIS Health Inc., Deprenyl Animal Health Inc.  and Pfizer Inc. (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2000, filed on  June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                                   |
| 4.2                  |       | License Agreement dated  November 12, 1997 between Deprenyl Animal Health Inc. and Pfizer Inc.  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on  June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                                                    |
| 4.3                  |       | Letter Agreement dated  December 22, 1999 between DRAXIS Health Inc., Deprenyl Animal Health  Inc. and Pfizer Inc. (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                                                                                                                                                                 |
| 4.4                  |       | Second Amendment dated  December 18, 2001 to the Master Agreement, as amended December 22,  1999, License Agreement, Research Agreement, U.S. and Canada Manufacturing  and Supply Agreement and International Manufacturing and Supply Agreement  between Pfizer Inc., Deprenyl Animal Health, Inc. and DRAXIS Health Inc.  dated November 12, 1997 (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31,  2001, filed on May 20, 2002 (SEC file no. 000-17434)) |
| 4.5                  |       | Amending Agreement  dated March 31, 2003 between DRAXIS Health, Inc., Elan Pharma  International Limited and Elan Pharmaceuticals, Inc. (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the  year ended December 31, 2002, filed on May 14, 2003 (SEC file no.  000-17434))                                                                                                                                                                                                                  |
| 4.6                  |       | First Amendment to  Subscription Agreement dated October 24, 2002 among SGF Santé Inc.,  DRAXIS Health Inc. and DRAXIS Pharma Inc. (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2002, filed on May 14, 2003 (SEC file no. 000-17434))                                                                                                                                                                                                                             |
| 4.7                  |       | Share Purchase  Agreement dated April 22, 2004 between DRAXIS Health Inc. and SGF Santé  Inc. (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on  May 14, 2004 (SEC file no. 000-17434))                                                                                                                                                                                                                                                                  |
| 4.8                  |       | Share Purchase  Agreement dated July 16, 2003 between Mohammed Barkat and Draxis Pharma  Inc. (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on  May 14, 2004 (SEC file no. 000-17434))                                                                                                                                                                                                                                                                       |

 

140

----

 
| 4.9        |   | Share Purchase  Agreement dated July 16, 2003 between Michel Sauvageau and DRAXIS Pharma  Inc. (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on  May 14, 2004 (SEC file no. 000-17434))                                           |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.10       |   | Term Loan Agreement  dated June 9, 1998 between National Bank of Canada and DRAXIS Pharma  Inc. (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on  June 29, 2001 (SEC file no. 000-17434))                                         |
| 4.11       |   | Credit  Agreement dated February 18, 2000 between National Bank of Canada and  DRAXIS Pharma Inc. (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2000, filed on  June 29, 2001 (SEC file no. 000-17434))                                       |
| 4.12       |   | Underwriting Agreement  dated April 2, 2004 between DRAXIS Health Inc., Desjardins Securities  Inc. and CIBC World Markets Inc. (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31,  2003, filed on May 14, 2004 (SEC file no. 000-17434))          |
| 4.13† |   | Asset Purchase  Agreement dated July 22, 2003 between DRAXIS Health Inc. and Shire  Biochem Inc. (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on  May 14, 2004 (SEC file no. 000-17434))                                         |
| 4.14       |   | Stock Option Plan of  DRAXIS Health Inc., as amended, dated June 27, 2001 (incorporated herein  by reference to the Company’s Annual Report (Form 20-F) for the year  ended December 31, 2003, filed on May 14, 2004 (SEC file no.  000-17434))                                                               |
| 4.15       |   | DRAXIS Health Inc.  Employee Stock Ownership Plan, amended and restated, effective  December 1, 1998 (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434))                                    |
| 4.16       |   | DRAXIS Health Inc.  Employee Participation Share Purchase Plan, effective February 16, 1995  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on  June 29, 2001 (SEC file no. 000-17434))                                            |
| 4.17       |   | DRAXIS Health Inc.  Deferred Share Unit Plan for Employees (incorporated herein by reference to  the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434))                                                                                   |
| 4.18       |   | DRAXIS Health Inc.  Equity Purchase Plan (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2000,  filed on June 29, 2001 (SEC file no. 000-17434))                                                                                                     |
| 4.19       |   | DRAXIS Retirement  Savings Program (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2002, filed on  May 14, 2003 (SEC file no. 000-17434))                                                                                                            |
| 4.20       |   | Shareholder Rights Plan  Agreement dated April 23, 2002 between DRAXIS Health Inc. and  Computershare Trust Company of Canada as trustee (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2001, filed on May 20, 2002 (SEC file no. 000-17434)) |
| 4.21       |   | Employment Agreement  dated April 15, 1999 between DRAXIS Health Inc. and Dr. Martin  Barkin (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on  June 29, 2001 (SEC file no. 000-17434))                                       |

 

141

----

 
| 4.22 |   | Amendment dated  June 14, 2000 to Employment Agreement dated April 15, 1999 between  DRAXIS Health Inc. and Dr. Martin Barkin (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2000, filed on June 29, 2001 (SEC file no. 000-17434)) |
|------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.23 |   | Retirement Compensation  Agreement dated September 24, 2003 between DRAXIS Health Inc. and  Dr. Martin Barkin (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2003,  filed on May 14, 2004 (SEC file no. 000-17434))                       |
| 4.24 |   | Employment Agreement  dated April 27, 2004 between DRAXIS Health Inc. and Dan Brazier  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on  May 14, 2004 (SEC file no. 000-17434))                                                   |
| 4.25 |   | Employment Agreement  dated October 18, 2000 between DRAXIS Health Inc. and Jack A. Carter  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2000, filed on  June 29, 2001 (SEC file no. 000-17434))                                             |
| 4.26 |   | Amendment dated  March 26, 2004 to Employment Agreement dated October 18, 2000  between DRAXIS Health Inc. and Jack A. Carter (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))       |
| 4.27 |   | Employment Agreement  dated April 22, 2003 between DRAXIS PHARMA Inc. and John E.M. Durham  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on  May 14, 2004 (SEC file no. 000-17434))                                              |
| 4.28 |   | Amendment dated  March 26, 2004 to Employment Agreement dated April 22, 2003 between  DRAXIS PHARMA Inc. and John E.M. Durham (incorporated herein by reference to  the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))       |
| 4.29 |   | Employment Agreement  dated October 17, 2003 between DRAXIS Health Inc. and Alida Gualtieri  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on  May 14, 2004 (SEC file no. 000-17434))                                             |
| 4.30 |   | Amendment dated  March 26, 2004 to Employment Agreement dated October 17, 2003  between DRAXIS Health Inc. and Alida Gualtieri (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))      |
| 4.31 |   | Employment Agreement  dated March 9, 2004 between DRAXIS Health Inc. and Chien Huang  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on  May 14, 2004 (SEC file no. 000-17434))                                                    |
| 4.32 |   | Employment Agreement  dated March 9, 2004 between DRAXIS Health Inc. and Mark Oleksiw  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on  May 14, 2004 (SEC file no. 000-17434))                                                   |
| 4.33 |   | Employment Agreement  dated May 14, 2001 between DRAXIS Health Inc. and Jerry Ormiston  (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2001, filed on  May 20, 2002 (SEC file no. 000-17434))                                                  |

 

142

----

 
| 4.34       |   | Amendment dated  March 26, 2004 to Employment Agreement dated May 14, 2001 between  DRAXIS Health Inc. and Jerry Ormiston (incorporated herein by reference to  the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))                                                                                                                                                      |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.35       |   | Employment Agreement  dated October 1, 1997 between DRAXIS Health Inc. and Dr. Richard J.  Flanagan (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2003, filed on  May 14, 2004 (SEC file no. 000-17434))                                                                                                                                                                            |
| 4.36       |   | Amendment dated  July 23, 2001 to Employment Agreement dated October 1, 1997 between  DRAXIS Health Inc. and Dr. Richard J. Flanagan (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2003, filed on May 14, 2004 (SEC file no. 000-17434))                                                                                                                                      |
| 4.37† |   | Non Exclusive  Distribution Agreement dated October 25, 1995 between Frosst  Radiopharmaceuticals, a division of Merck Frosst Canada Inc. (now known as  DRAXIMAGE) and Syncor International Corporation (now known as Cardinal Health  414, LLC) (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2004, filed on  March 31, 2005 (SEC file no. 000-17434))                                 |
| 4.38† |   | Non Exclusive  Distribution Agreement dated July 12, 2000 between DRAXIMAGE and Syncor  International (now known as Cardinal Health 414, LLC) (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2004, filed on March 31, 2005 (SEC file no.  000-17434))                                                                                                                                    |
| 4.39† |   | Amendment dated  August 6, 2003 to Non Exclusive Distribution Agreement dated  July 12, 2000 between DRAXIMAGE and Syncor International (now known as  Cardinal Health 414, LLC) (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2004,  filed on March 31, 2005 (SEC file no. 000-17434))                                                                                             |
| 4.40† |   | Manufacturing and  Supply Agreement dated July 1, 1999 between Warner-Lambert Canada Inc.  (now known as Pfizer Consumer Healthcare, a Division of Pfizer Canada Inc.)  and DRAXIS Pharma Inc. (now known as DRAXIS Pharma, a division of DRAXIS  Specialty Pharmaceuticals Inc.) (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31,  2004, filed on March 31, 2005 (SEC file no. 000-17434)) |
| 4.41† |   | Supply Agreement dated  December 18, 2001 between GlaxoSmithKline Inc. and DRAXIS Pharma Inc.  (now known as DRAXIS Pharma, a division of DRAXIS Specialty Pharmaceuticals  Inc.) (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2004, filed on  March 31, 2005 (SEC file no. 000-17434))                                                                                                 |
| 4.42† |   | Manufacture and Supply  Agreement entered into between DRAXIS Pharma Inc. (now known as DRAXIS  Pharma, a division of DRAXIS Specialty Pharmaceuticals Inc.) and Bone Care  International, Inc. on March 3, 2003 (incorporated herein by  reference to the Company’s Annual Report (Form 20-F) for the year ended December 31,  2004, filed on March 31, 2005 (SEC file no. 000-17434))                                                             |
| 4.43       |   | Amendment dated  August 25, 2004 to Employment Agreement dated April 27, 2004  between DRAXIS Health Inc. and Dan Brazier (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2004, filed on March 31, 2005 (SEC file no.  000-17434))                                                                                                                                                   |

 

143

----

 
| 4.44       |   | Amended and Restated  Loan Agreement dated June 10, 2004 between DRAXIS Health Inc. and  National Bank of Canada (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2004,  filed on March 31, 2005 (SEC file no. 000-17434))                                                                            |
|------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.45       |   | Amendment dated  June 23, 2004 to Employment Agreement dated April 15, 1999 between  DRAXIS Health Inc. and Martin Barkin (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31,  2004, filed on March 31, 2005 (SEC file no. 000-17434))                                                              |
| 4.46       |   | Amendment to Credit  Facilities for DRAXIS Pharma Inc. dated March 28, 2002 between National  Bank of Canada and DRAXIS Pharma Inc. (incorporated herein by reference to  the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2001, filed on May 20, 2002 (SEC file  No. 000-17434))                                                     |
| 4.47       |   | Loan Agreement dated  March 28, 2002 among DRAXIS Pharma Inc., SGF Santé Inc. and DRAXIS  Health Inc. (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2001, filed on  May 20, 2002 (SEC file No. 000-17434))                                                                               |
| 4.48       |   | Loan Agreement dated  March 28, 2002 among DRAXIS Pharma Inc., Investissement Québec and  DRAXIS Health Inc. (incorporated herein by reference to the Company’s Annual  Report (Form 20-F) for the year ended December 31, 2001, filed on  May 20, 2002 (SEC file No. 000-17434))                                                                        |
| 4.49       |   | First Amendment to  Subscription Agreement dated October 24, 2002 among SGF Santé Inc.,  DRAXIS Health Inc. and DRAXIS Pharma Inc. (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2002, filed on May 14, 2003 (SEC file  No. 000-17434))                                                 |
| 4.50† |   | Manufacturing and Supply Master Agreement, dated January 1, 2005,  between Pfizer Canada Inc. and DRAXIS Pharma, a division of DRAXIS Specialty  Pharmaceuticals Inc. (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the  year ended December 31, 2005, filed on March 31, 2006 (SEC file  No. 000-17434))                 |
| 4.51† |   | Amendment, dated December 20, 2005, to Employment Agreement dated  April 27, 2004, as amended between DRAXIS Health Inc. and Dan Brazier,  Chief Operating Officer of the Company (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2005,  filed on March 31, 2006 (SEC file No. 000-17434)) |
| 4.52† |   | Employment Agreement, dated April 22, 2005, between DRAXIS Health  Inc. and Mr. Jean-Pierre Robert, President of DRAXIMAGE, a division of  DRAXIS Specialty Pharmaceuticals Inc. (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2005,  filed on March 31, 2006 (SEC file No. 000-17434))  |
| 4.53† |   | Retirement Compensation Arrangement Trust  Agreement, dated July 8, 2005, between DRAXIS Health Inc. and  Dr. Richard Flanagan (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2005, filed on  March 31, 2006 (SEC file No. 000-17434))                                                    |
| 4.54       |   | Charter of the Board of  Directors adopted in April 2004 (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31,  2005, filed on March 31, 2006 (SEC file No. 000-17434))                                                                                                                               |
| 4.55       |   | Charter of the Audit  Committee amended in May 2005 (incorporated herein by reference to the  Company’s Annual Report (Form 20-F) for the year ended December 31,  2005, filed on March 31, 2006 (SEC file No. 000-17434))                                                                                                                                    |

 

144

----

 
| 4.56        |   | Charter of the Human  Resources and Compensation Committee amended in May 2005 (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the  year ended December 31, 2005, filed on March 31, 2006 (SEC file  No. 000-17434))    |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.57        |   | Charter of the Nominating  and Corporate Governance Committee amended in May 2005 (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the  year ended December 31, 2005, filed on March 31, 2006 (SEC file  No. 000-17434)) |
| 4.58        |   | 2006 Stock Option Plan (incorporated  herein by reference to the Company’s Annual Report (Form 20-F) for the  year ended December 31, 2006, filed on March 30, 2007 (SEC file  No. 000-17434))                                                                 |
| 4.59        |   | Terms of reference of  the Non Executive Chair (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2006,  filed on March 30, 2007 (SEC file No. 000-17434))                                          |
| 4.60        |   | Terms of reference of  the Committee Chairs (incorporated herein by reference to the Company’s  Annual Report (Form 20-F) for the year ended December 31, 2006,  filed on March 30, 2007 (SEC file No. 000-17434))                                             |
| 4.61        |   | Terms of reference for  the CEO (incorporated herein by reference to the Company’s Annual Report  (Form 20-F) for the year ended December 31, 2006, filed on  March 30, 2007 (SEC file No. 000-17434))                                                         |
| 4.62        |   | Charter of the Audit  Committee as amended in February 2007 (incorporated herein by reference  to the Company’s Annual Report (Form 20-F) for the year ended  December 31, 2006, filed on March 30, 2007 (SEC file No. 000-17434))                        |
| 4.63*       |   | Amended 2006 Stock  Option Plan                                                                                                                                                                                                                                                         |
| 4.64*       |   | Amended Stock Option  Plan of DRAXIS Health Inc.                                                                                                                                                                                                                                        |
| 4.65*       |   | Amended Deferred Share  Unit Plan                                                                                                                                                                                                                                                       |
| 4.66*       |   | Amended terms of  reference of the Non Executive Chair                                                                                                                                                                                                                                  |
| 4.67*       |   | Amended terms of  reference for the CEO                                                                                                                                                                                                                                                 |
| 4.68†* |   | Manufacture and Supply  Agreement dated September 4, 2007 among DRAXIS Pharma, a division of  DRAXIS Specialty Pharmaceuticals Inc. and Johnson & Johnson Consumer  Companies, Inc.                                                                                  |
| 4.69†* |   | Credit Agreement dated  September 4, 2007 among DRAXIS Pharma, a division of DRAXIS Specialty  Pharmaceuticals Inc. and Johnson & Johnson Finance Corporation                                                                                                             |
| 4.70†* |   | Distribution Agreement  dated December 20, 2007 among DRAXIMAGE LLC and Medi-Physics doing  business as GE Healthcare                                                                                                                                                              |
| 4.71†* |   | Amendment dated  January 31, 2008, to Employment Agreement dated October 17, 2003,  as amended between DRAXIS Health Inc. and Alida Gualtieri, General  Counsel & Secretary of the Company                                                                           |
| 4.72†* |   | Amendment dated  January 31, 2008, to Employment Agreement dated March 9, 2004, as  amended between DRAXIS Health Inc. and Mark Oleksiw, Chief Financial Officer  of the Company                                                                                              |
| 4.73†* |   | Amendment dated  January 31, 2008, to Employment Agreement dated May 15, 2001, as  amended between DRAXIS Health Inc. and Jerry Ormiston, Executive Director,  Investor Relations of the Company                                                                              |
| 4.74†* |   | Employment Agreement,  dated February 7, 2008, between DRAXIS Health Inc. and Dan Brazier,  President & CEO of the Company                                                                                                                                                |
| 4.75†* |   | Employment Agreement,  dated March 3, 2008, between DRAXIS Health Inc. and Jean-Pierre Robert,  Chief Operating Officer of the Company and President of DRAXIS Specialty  Pharmaceuticals Inc.                                                                                     |

 

145

----

 
| 4.76†* |   | Amendment dated  March 6, 2008, to Employment Agreement dated October 17, 2003, as  amended between DRAXIS Health Inc. and Alida Gualtieri, General  Counsel & Secretary of the Company |
|-------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 8.1*        |   | List of Subsidiaries                                                                                                                                                                                       |
| 12.1*       |   | Certification of CEO  required by Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                       |
| 12.2*       |   | Certification of CFO  required by Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                       |
| 13.1*       |   | Certification of CEO  required by Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                       |
| 13.2*       |   | Certification of CFO  required by Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                       |

----

* Filed herewith

† Portions of theexhibits have been omitted pursuant to a confidential treatment request. Thisinformation has been filed separately with the Securities and ExchangeCommission.

 

146

----

 

**MANAGEMENT’SREPORT**

 

The Company’s management isresponsible for preparing the accompanying consolidated financial statements inconformity with accounting principles generally accepted in the United Statesof America (“GAAP”). In preparing these consolidated financial statements,management selects accounting policies and uses its judgment and bestestimates, as appropriate in the circumstances. Management has determined suchamounts on a reasonable basis in order to ensure that the financial statementsare presented fairly, in all material respects.

 

The Company maintains asystem of internal accounting controls designed to provide reasonableassurance, at a reasonable cost, that assets are safeguarded and thattransactions are executed and recorded in accordance with the Company’spolicies. This system is supported by policies and procedures for key businessactivities, by the hiring of qualified staff and by a continuous planning andmonitoring program.

 

Deloitte & ToucheLLP has been engaged by the Company’s shareholders to audit the ConsolidatedFinancial Statements. During the course of their audit, Deloitte &Touche LLP considered the Company’s system of internal controls to the extentnecessary to render their opinion on the Consolidated Financial Statements; inaddition, theywereengaged to express an opinion regarding the effectiveness of the Company’ssystem of internal controls over financial reporting.

 

The Board of Directors isresponsible for ensuring that management fulfills its responsibility forfinancial reporting and is ultimately responsible for reviewing and approvingthe financial statements. The Board carries out the responsibility principallythrough its Audit Committee. The members of the Audit Committee are outsidedirectors. The Committee considers, for review by the Board of Directors andapproval by the shareholders, the engagement or reappointment of the externalauditors. Deloitte & Touche LLP has full and free access to the AuditCommittee.

 

Management acknowledges itsresponsibility to provide financial information that is representative of theCompany’s operations, is consistent and reliable, and is relevant for theinformed evaluation of the Company’s activities.

 

 
| (signed)                                  |   | (signed)                |
|-------------------------------------------|--------|-------------------------|
|                                      |   |                    |
|                                      |   |                    |
| DAN BRAZIER                               |   | MARK OLEKSIW, CA        |
| President and Chief  Executive Officer    |   | Chief Financial Officer |
| Toronto, Ontario,  February 22, 2008 |   |                    |

 

F-1

----

 

**MANAGEMENT’S REPORT ON INTERNALCONTROL OVER FINANCIAL REPORTING**

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting for the Company. Internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof our financial reporting for external purposes in accordance with accountingprinciples generally accepted in the United States of America. Internal controlover financial reporting includes maintaining records that in reasonable detailaccurately and fairly reflect the transactions and disposition of our assets;providing reasonable assurance that transactions are recorded as necessary forpreparation of our financial statements; providing reasonable assurance thatreceipts and expenditures of the Company are made in accordance with managementauthorization; and providing reasonable assurance that unauthorizedacquisition, use or disposition of Company assets that could have a materialeffect on our financial statements would be prevented or detected on a timelybasis. Because of its inherent limitations, internal control over financialreporting is not intended to provide absolute assurance that a misstatement ofour financial statements would be prevented or detected. Also, projections ofany evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

Management conducted anevaluation of the effectiveness of our internal control over financialreporting based on the framework in *Internal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. Based on this evaluation, managementconcluded that the Company’s internal control over financial reporting waseffective as of December 31, 2007.

 

The effectiveness of theCompany’s internal control over financial reporting as of December 31,2007 has been audited by the Company’s auditors, Deloitte & ToucheLLP, Independent Registered Chartered Accountants, as stated in their reportappearing on page 34.

 

 
| (signed)                                  |   | (signed)                |
|-------------------------------------------|--------|-------------------------|
|                                      |   |                    |
|                                      |   |                    |
| DAN BRAZIER                               |   | MARK OLEKSIW, CA        |
| President and Chief  Executive Officer    |   | Chief Financial Officer |
| Toronto, Ontario,  February 22, 2008 |   |                    |

 

F-2

----

 

**REPORT OF INDEPENDENT REGISTERED CHARTEREDACCOUNTANTS**

 

## **TO THE SHAREHOLDERS AND BOARD OFDIRECTORS OF DRAXIS HEALTH INC.**

 

We have audited the internal control over financialreporting of DRAXIS Health Inc. and subsidiaries (the “Company”) as of December 31,2007, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission. The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting, included in the accompanying Management’s Report on Internal Controlover Financial Reporting. Our responsibility is to express an opinion on theeffectiveness of the Company’s internal control over financial reporting basedon our audit.

 

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the riskthat a material weakness exists, testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk, andperforming such other procedures as we considered necessary in the circumstances.We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reportingis a process designed by, or under the supervision of, the company’s principalexecutive and principal financial officers, or persons performing similarfunctions, and effected by the company’s board of directors, management, andother personnel to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internalcontrol over financial reporting, including the possibility of collusion orimproper management override of controls, material misstatements due to erroror fraud may not be prevented or detected on a timely basis. Also, projectionsof any evaluation of the effectiveness of the internal control over financialreporting to future periods are subject to the risk that the controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

In our opinion, the Company maintained, in allmaterial respects, effective internal control over financial reporting as of December 31,2007, based on the criteria established in *Internal Control —Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

We have also audited, in accordance with Canadiangenerally accepted auditing standards and with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidated financialstatements as of and for the year ended December 31, 2007 of the Companyand our report dated February 22, 2008 expressed an unqualified opinion onthose financial statements and included a separate report titled *Comments by Independent Registered Chartered Accountants onCanada-United States of America Reporting Differences* referring tochanges in accounting principles.

 

(signed)

 

DELOITTE & TOUCHE LLPMontreal, Québec, February 22, 2008

 

F-3

----

 

**REPORT OF INDEPENDENT REGISTEREDCHARTERED ACCOUNTANTS**

 

## **TO THE SHAREHOLDERS AND BOARD OFDIRECTORS OF DRAXIS HEALTH INC.**

 

We have audited theaccompanying consolidated balance sheets of DRAXIS Health Inc. and subsidiaries(the “Company”) as of December 31, 2007 and 2006, and the relatedconsolidated statements of operations, changes in equity and comprehensiveincome and cash flows for each of the three years in the period ended December 31,2007. These consolidated financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

 

We conducted our audits inaccordance with Canadian generally accepted auditing standards and thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, theseconsolidated financial statements present fairly, in all material respects, thefinancial position of DRAXIS Health Inc. and subsidiaries as of December 31,2007 and 2006, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2007 inaccordance with accounting principles generally accepted in the United Statesof America.

 

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the Company’s internal control over financial reporting as of December 31,2007, based on the criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission and our report dated February 22,2008 expressed an unqualified opinion on the Company’s internal control overfinancial reporting.

 

(signed)

 

DELOITTE & TOUCHELLPMontreal, Québec, February 22, 2008

 

**COMMENTS BY THE INDEPENDENTREGISTERED CHARTERED ACCOUNTANTS ON CANADA-UNITED STATES OF AMERICA REPORTINGDIFFERENCES**

 

The standards of the PublicCompany Accounting Oversight Board (United States) require the addition of anexplanatory paragraph (following the opinion paragraph) when there are changesin accounting principles that have a material effect on the comparability ofthe Company’s financial statements, such as the changes described in Note 2(g) andNote 3 to the consolidated financial statements. Our report to the Shareholdersand the Board of Directors, dated February 22, 2008, is expressed inaccordance with Canadian reporting standards which do not require reference tosuch changes in accounting principles in the Report of Independent RegisteredChartered Accountants when the changes are properly accounted for and adequatelydisclosed in the financial statements.

 

(signed)

 

DELOITTE &TOUCHE LLPMontreal, Québec, February 22, 2008

 

F-4

----

 

**Consolidated Statements of Operations**

*(inthousands of U.S. dollars, except share related data)*

 

 
| **Years ended December 31**                            | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **REVENUES**                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Product sales                                               | ** ** | **$**      | **76,072** |       | $          | 83,545     |       | $ | 72,989 |   |
| Royalty and licensing (Note 13)                             | ** ** | **2,788**  |       | 5,422      |       | 6,444      |       |
|                                                        | ** ** | **78,860** |       | 88,967     |       | 79,433     |       |
| **EXPENSES**                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of goods sold, excluding depreciation and amortization | ** ** | **49,618** |       | 47,083     |       | 46,836     |       |
| Selling, general and administration                         | ** ** | **18,807** |       | 19,425     |       | 16,185     |       |
| Research and development                                    | ** ** | **2,446**  |       | 2,372      |       | 2,103      |       |
| Depreciation and amortization                               | ** ** | **5,841**  |       | 5,135      |       | 4,545      |       |
|                                                        | ** ** | **76,712** |       | 74,015     |       | 69,669     |       |
| Operating income                                            | ** ** | **2,148**  |       | 14,952     |       | 9,764      |       |
| Financial income  (expense), net (Note 4)                   | ** ** | **870**    |       | 347        |       | (29        | )          |
| Foreign exchange (loss)  gain                               | ** ** | **(1,716** | **)**      | 282        |       | (398       | )          |
| Income before income taxes                                  | ** ** | **1,302**  |       | 15,581     |       | 9,337      |       |
| Income tax (recovery)  expense (Note 5)                     | ** ** | **(356**   | **)**      | 4,034      |       | 1,553      |       |
| Net income                                                  | ** ** | **$**      | **1,658**  |       | $          | 11,547     |       | $ | 7,784 |   |
|                                                        |       |       |       |       |       |       |       |
| **Basic earnings per share (Note  6)**                      | ** ** | **$**      | **0.04**   |       | $          | 0.28       |       | $ | 0.19 |   |
|                                                        |       |       |       |       |       |       |       |
| **Diluted earnings per share  (Note 6)**                    | ** ** | **$**      | **0.04**   |       | $          | 0.28       |       | $ | 0.18 |   |

* *

*Seethe accompanying notes to the Consolidated Financial Statements*

* *

Approvedby the Board

 
| (signed)    |   | (signed)       |
|-------------|--------|----------------|
|        |   |           |
| BRIAN  KING |   | SAMUEL  SARICK |
| Director    |   | Director       |

 

 

F-5

----

 

**Consolidated Balance Sheets**

*(inthousands of U.S. dollars, except share related data)*

 

 
| **As at December 31**                                                                                                                                                    | ** ** | **2007**    | ** **  | **2006**   | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------|-------------|------------|------------|
| **ASSETS**                                                                                                                                                                    | ** ** | ** **  | ** **  | ** ** | ** ** |
| **Current  assets**                                                                                                                                                           | ** ** | ** **  | ** **  | ** ** | ** ** |
| Cash and cash equivalents                                                                                                                                                     | ** ** | **$**       | **24,796**  |       | $          | 21,446 |   |
| Restricted cash (Note 7)                                                                                                                                                      | ** ** | **1,326**   |        | —     |       |
| Accounts receivable (Note  8)                                                                                                                                                 | ** ** | **18,059**  |        | 20,683     |       |
| Inventories (Note 9)                                                                                                                                                          | ** ** | **9,620**   |        | 7,590      |       |
| Prepaid expenses                                                                                                                                                              | ** ** | **1,358**   |        | 735        |       |
| Deferred income taxes, net  (Note 5)                                                                                                                                          | ** ** | **4,119**   |        | 3,179      |       |
| Total  current assets                                                                                                                                                         | ** ** | **59,278**  |        | 53,633     |       |
|                                                                                                                                                                          |       |        |        |       |       |
| Accounts receivable, long  term (Note 8)                                                                                                                                      | ** ** | **2,514**   |        | —     |       |
| Property, plant and  equipment, net (Note 10)                                                                                                                                 | ** ** | **58,494**  |        | 46,292     |       |
| Goodwill                                                                                                                                                                      | ** ** | **885**     |        | 753        |       |
| Intangible assets, net  (Note 11)                                                                                                                                             | ** ** | **240**     |        | 318        |       |
| Other assets                                                                                                                                                                  | ** ** | **310**     |        | 407        |       |
| Deferred income taxes, net  (Note 5)                                                                                                                                          | ** ** | **6,213**   |        | 4,559      |       |
| Total  assets                                                                                                                                                                 | ** ** | **$**       | **127,934** |       | $          | 105,962 |   |
|                                                                                                                                                                          |       |        |        |       |       |
| **LIABILITIES**                                                                                                                                                               | ** ** | ** **  | ** **  | ** ** | ** ** |
| **Current  liabilities**                                                                                                                                                      | ** ** | ** **  | ** **  | ** ** | ** ** |
| Accounts payable and  accrued liabilities (Note 12)                                                                                                                           | ** ** | **$**       | **11,904**  |       | $          | 10,940 |   |
| Current portion of  deferred revenues (Note 13)                                                                                                                               | ** ** | **411**     |        | 329        |       |
| Customer deposits                                                                                                                                                             | ** ** | **385**     |        | 576        |       |
| Total current liabilities                                                                                                                                                     | ** ** | **12,700**  |        | 11,845     |       |
|                                                                                                                                                                          |       |        |        |       |       |
| Other liabilities (Note  15)                                                                                                                                                  | ** ** | **164**     |        | 990        |       |
| Deferred revenues (Note  13)                                                                                                                                                  | ** ** | **594**     |        | 712        |       |
| Customer financing (Note  16)                                                                                                                                                 | ** ** | **3,135**   |        | —     |       |
| Total liabilities                                                                                                                                                             | ** ** | **16,593**  |        | 13,547     |       |
|                                                                                                                                                                          |       |        |        |       |       |
| Commitments and  contingencies (Note 20)                                                                                                                                      |       |        |        |       |       |
|                                                                                                                                                                          |       |        |        |       |       |
| **SHAREHOLDERS’ EQUITY**                                                                                                                                                 | ** ** | ** **  | ** **  | ** ** | ** ** |
| Common stock, without par  value of unlimited number of shares authorized, 42,062,538 and 41,522,138  issued and outstanding at December 31, 2007 and 2006, respectively | ** ** | **79,814**  |        | 77,749     |       |
| Additional paid-in capital                                                                                                                                                    | ** ** | **15,984**  |        | 15,475     |       |
| Deficit                                                                                                                                                                       | ** ** | **(6,576**  | **)**       | (8,234     | )          |
| Accumulated other comprehensive  income                                                                                                                                       | ** ** | **22,119**  |        | 7,425      |       |
| Total shareholders’ equity                                                                                                                                               | ** ** | **111,341** |        | 92,415     |       |
| Total liabilities and  shareholders’ equity                                                                                                                              | ** ** | **$**       | **127,934** |       | $          | 105,962 |   |

* *

*See the accompanying notes to the ConsolidatedFinancial Statements*

* *

 

F-6

----

 

**Consolidated Statements of Changes in Equity andComprehensive Income (Loss)**

*(inthousands of U.S. dollars, except share related data)*

 
| **Years ended December 31**                       | ** ** | **2007**       | ** **  | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------------|------------|----------------|-------------|------------|------------|------------|------------|
| **COMMON STOCK (NUMBER OF SHARES)**                    | ** ** | ** **     | ** **  | ** ** | ** ** | ** ** | ** ** |
| Balance, beginning of year                             | ** ** | **41,522,138** |        | 41,588,005 |       | 41,015,326 |       |
| Exercise of options                                    | ** ** | **670,500**    |        | 647,333    |       | 648,279    |       |
| Repurchased for cancellation                           | ** ** | **(130,100**   | **)**       | (713,200   | )          | (75,600    | )          |
| Balance, end of year                                   | ** ** | **42,062,538** |        | 41,522,138 |       | 41,588,005 |       |
| **COMMON STOCK**                                       | ** ** | ** **     | ** **  | ** ** | ** ** | ** ** | ** ** |
| Balance, beginning of year                             | ** ** | **$**          | **77,749**  |       | $          | 77,313     |       | $ | 75,840 |   |
| Exercise of options                                    | ** ** | **2,058**      |        | 1,934      |       | 1,628      |       |
| Fair values of options exercised                       | ** ** | **325**        |        | —     |       | —     |       |
| Repurchased for cancellation                           | ** ** | **(318**       | **)**       | (1,498     | )          | (155       | )          |
| Balance, end of year                                   | ** ** | **$**          | **79,814**  |       | $          | 77,749     |       | $ | 77,313 |   |
| **ADDITIONAL PAID-IN CAPITAL**                         | ** ** | ** **     | ** **  | ** ** | ** ** | ** ** | ** ** |
| Balance, beginning of year                             | ** ** | **$**          | **15,475**  |       | $          | 15,370     |       | $ | 15,546 |   |
| Stock-based compensation                               | ** ** | **1,202**      |        | 968        |       | —     |       |
| Fair values of options exercised                       | ** ** | **(325**       | **)**       | —     |       | —     |       |
| Expired warrants                                       | ** ** | **—**     |        | 916        |       | —     |       |
| Common shares purchased for cancellation (Note (17(b)) | ** ** | **(368**       | **)**       | (1,779     | )          | (176       | )          |
| Balance, end of year                                   | ** ** | **$**          | **15,984**  |       | $          | 15,475     |       | $ | 15,370 |   |
| **WARRANTS**                                           | ** ** | ** **     | ** **  | ** ** | ** ** | ** ** | ** ** |
| Balance, beginning of year                             | ** ** | **$**          | **—**  |       | $          | 916        |       | $ | 916 |   |
| Expiry of warrants (Note 17(a))                        | ** ** | **—**     |        | (916       | )          | —     |       |
| Balance, end of year                                   | ** ** | **$**          | **—**  |       | $          | —     |       | $ | 916 |   |
| **DEFICIT**                                            | ** ** | ** **     | ** **  | ** ** | ** ** | ** ** | ** ** |
| Balance, beginning of year                             | ** ** | **$**          | **(8,234**  | **)**      | $          | (19,781    | )          | $ | (27,565 | ) |
| Net income                                             | ** ** | **1,658**      |        | 11,547     |       | 7,784      |       |
| Balance, end of year                                   | ** ** | **$**          | **(6,576**  | **)**      | $          | (8,234     | )          | $ | (19,781 | ) |
| **ACCUMULATED OTHER COMPREHENSIVE  INCOME (LOSS)**     | ** ** | ** **     | ** **  | ** ** | ** ** | ** ** | ** ** |
| Balance, beginning of year                             | ** ** | **$**          | **7,425**   |       | $          | 7,810      |       | $ | 5,183 |   |
| Other comprehensive income (loss)                      | ** ** | **14,694**     |        | (385       | )          | 2,627      |       |
| Balance, end of year                                   | ** ** | **22,119**     |        | 7,425      |       | 7,810      |       |
| **Total shareholders’ equity**                    | ** ** | **$**          | **111,341** |       | $          | 92,415     |       | $ | 81,628 |   |
| **Comprehensive Income (Loss)**                        | ** ** | ** **     | ** **  | ** ** | ** ** | ** ** | ** ** |
| Foreign currency translation adjustments               | ** ** | **$**          | **14,694**  |       | $          | (385       | )          | $ | 2,627 |   |
| Net income                                             | ** ** | **1,658**      |        | 11,547     |       | 7,784      |       |
| **Total comprehensive income**                         | ** ** | **$**          | **16,352**  |       | $          | 11,162     |       | $ | 10,411 |   |

* *

*See the accompanying notes to the Consolidated Financial Statements*

* *

*F-7*

----

 

**Consolidated Statements of Cash Flows**

*(inthousands of U.S. dollars)*

 
| **Years ended December 31**                                                     | ** ** | **2007**    | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|------------|------------|
| **CASH FLOWS FROM (USED IN)  OPERATING ACTIVITIES**                                  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                           | ** ** | **$**       | **1,658**  |       | $          | 11,547     |       | $ | 7,784 |   |
| Adjustments to reconcile  net income to net cash from (used in) operating activities |       |        |       |       |       |       |       |
| Amortization of deferred revenues                                                    | ** ** | **(120**    | **)**      | (3,301     | )          | (3,701     | )          |
| Depreciation and amortization                                                        | ** ** | **5,841**   |       | 5,135      |       | 4,545      |       |
| Stock-based compensation                                                             | ** ** | **1,202**   |       | 968        |       | —     |       |
| Deferred income taxes                                                                | ** ** | **(1,316**  | **)**      | 3,227      |       | 765        |       |
| Foreign exchange                                                                     | ** ** | **1,326**   |       | (282       | )          | 398        |       |
| Deferred share unit (recovery) expense (Note 18(b))                                  | ** ** | **(383**    | **)**      | 245        |       | (117       | )          |
| Other                                                                                | ** ** | **648**     |       | 417        |       | 378        |       |
| Changes in operating  assets and liabilities                                         |       |        |       |       |       |       |       |
| Accounts receivable                                                                  | ** ** | **6,825**   |       | (4,615     | )          | (1,903     | )          |
| Accounts receivable, long term                                                       | ** ** | **(2,514**  | **)**      | —     |       | —     |       |
| Proceeds from customer financing used in operations                                  | ** ** | **1,535**   |       | —     |       | —     |       |
| Inventories                                                                          | ** ** | **(692**    | **)**      | 44         |       | 2,786      |       |
| Prepaid expenses                                                                     | ** ** | **(359**    | **)**      | 279        |       | (263       | )          |
| Accounts payable and accrued liabilities                                             | ** ** | **(233**    | **)**      | 2,280      |       | (1,648     | )          |
| Other liabilities                                                                    | ** ** | **(791**    | **)**      | 682        |       | 308        |       |
| Current portion of deferred revenues                                                 | ** ** | **(76**     | **)**      | (176       | )          | 385        |       |
| Net cash from (used in)  operating activities                                        | ** ** | **12,551**  |       | 16,450     |       | 9,717      |       |
| **CASH FLOWS (USED IN) FROM  INVESTING ACTIVITIES**                                  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Expenditures for property, plant and equipment                                       | ** ** | **(10,325** | **)**      | (5,656     | )          | (4,619     | )          |
| Increase in receivables related to property, plant and equipment                     | ** ** | **(1,543**  | **)**      | —     |       | —     |       |
| Increase in intangible assets                                                        | ** ** | **(200**    | **)**      | (359       | )          | (185       | )          |
| Restricted cash                                                                      | ** ** | **(1,326**  | **)**      | —     |       | 424        |       |
| Proceeds from disposition of property, plant and equipment                           | ** ** | **—**  |       | 22         |       | —     |       |
| Net cash from (used in)  investing activities                                        | ** ** | **(13,394** | **)**      | (5,993     | )          | (4,380     | )          |
| **CASH FLOWS (USED IN) FROM  FINANCING ACTIVITIES**                                  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Proceeds from customer financing                                                     | ** ** | **3,135**   |       | —     |       | —     |       |
| Proceeds from customer financing used in operations                                  | ** ** | **(1,535**  | **)**      | —     |       | —     |       |
| Decrease in customer deposits, net                                                   | ** ** | **(74**     | **)**      | (73        | )          | (2         | )          |
| Exercise of options                                                                  | ** ** | **2,058**   |       | 1,934      |       | 1,628      |       |
| Common shares purchased for cancellation                                             | ** ** | **(686**    | **)**      | (3,277     | )          | (331       | )          |
| Net cash from (used in)  financing activities                                        | ** ** | **2,898**   |       | (1,416     | )          | 1,295      |       |
| Effect of foreign exchange rate changes on cash and cash equivalents                 | ** ** | **1,295**   |       | 15         |       | (168       | )          |
| Net increase in cash and cash equivalents                                            | ** ** | **3,350**   |       | 9,056      |       | 6,464      |       |
| Cash and cash equivalents, beginning of year                                         | ** ** | **21,446**  |       | 12,390     |       | 5,926      |       |
| Cash and cash equivalents, end of year                                               | ** ** | **$**       | **24,796** |       | $          | 21,446     |       | $ | 12,390 |   |
|                                                                                 |       |        |       |       |       |       |       |
| **Additional Information**                                                           | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest paid                                                                        | ** ** | **$**       | **—** |       | $          | —     |       | $ | — |   |
| Income taxes paid                                                                    | ** ** | **$**       | **810**    |       | $          | 561        |       | $ | 804 |   |

* *

*See the accompanying notes to the Consolidated Financial Statements*

* *

*F-8*

----

 

**NOTESTO THE CONSOLIDATED FINANCIAL STATEMENTS**

 

### **For the years ended December 31, 2007, 2006 and2005 (in thousands of U.S. dollars, except share related data)**

### ** **

## **NOTE 1. NATURE OF OPERATIONS**

DRAXIS Health Inc. (“DRAXIS”or the “Company”) is a specialty pharmaceutical company providingpharmaceutical products in three major categories: sterile, including sterilelyophilized (freeze-dried) pharmaceuticals; non-sterile specialtypharmaceuticals; and radiopharmaceuticals. In the radiopharmaceutical category,DRAXIS has its own products and a targeted research and development (“R&D”)program for new and/or improved products. As of January 1, 2005,activities of the Company are carried out principally through its wholly ownedsubsidiary, DRAXIS Specialty Pharmaceuticals Inc., which operates two majordivisions, DRAXIS Pharma (contract manufacturing) and DRAXIMAGE(radiopharmaceuticals). The Company’s common shares are listed on NASDAQ andthe Toronto Stock Exchange (“TSX”).

 

## **NOTE2. SIGNIFICANT ACCOUNTING POLICIES**

 

### **(a)   Basis of Presentation**

The Company has prepared these Consolidated Financial Statements inU.S. dollars and in accordance with generally accepted accounting principles(“GAAP”) in the U.S.

 

### **(b)   Principles of Consolidation**

The Consolidated FinancialStatements include the accounts of the Company and its wholly owned subsidiarycompanies.  All intercompany transactionsand balances are eliminated on consolidation.

 

### **(c)   Use of Estimates**

The preparation of theCompany’s Consolidated Financial Statements requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from those estimates.Significant estimates and assumptions are required when accounting for itemsand matters such as asset impairments, allowance for uncollectible accountsreceivable, inventory obsolescence, warranties and provisions, depreciation andamortization, deferred and current income taxes, stock-based compensation andcontingencies.

 

### **(d)   Reporting Currency andForeign Currency Translation**

The Company’s principalfunctional currency is the Canadian dollar; however, it reports itsConsolidated Financial Statements in U.S. dollars. The financial statements ofthe parent company and its non-U.S. subsidiaries whose functional currency isnot the U.S. dollar are translated into U.S. dollars in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 52, *Foreign Currency Translation*. Asset and liability accountsare 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 forthe period. The cumulative foreign currency translation adjustment is reportedas a component of accumulated other comprehensive income in shareholders’equity. The net change in the cumulative foreign currency translationadjustment in the periods presented is primarily due to fluctuations in theexchange rates between the Company’s reporting currency and the Canadiandollar.

 

F-9

----

 

Foreign denominated monetaryassets and liabilities of the Company are translated at the exchange rates ineffect at the balance sheet dates. Revenues and expenses are translated ataverage rates for the period. Resulting translation gains or losses arereflected in net income.

 

### **(e)   Revenue Recognition**

***Product Sales***

The Company recognizesrevenue, net of trade discounts and allowances, when evidence of an arrangementexists, delivery has occurred or services have been rendered, the price isfixed or determinable and collectability is reasonably assured. Salesincentives are recorded as a reduction of revenues at the time the relatedrevenues are recorded. Delivery has occurred when goods are shipped and titlehas passed.

 

Amounts received fromcustomers as prepayments for products to be shipped or services to be providedin the future are reported as customer deposits and recognized as revenue whendelivery has occurred or services have been rendered.

 

Product sales includerelated service revenues that are recognized at the time of performance orproportionately over the term of the contract, as appropriate.

 

***Royalty and Licensing***

Royalty revenue isrecognized on an accrual basis in accordance with contractual agreements whenall significant contractual obligations have been satisfied, the amounts aredeterminable and collection is reasonably assured. Royalty revenue is net ofamounts owing to sublicensees where the Company is acting as an agent for thesublicensee.

 

License and other forms ofnon-refundable fees received pursuant to collaboration agreements are accountedfor according to the related contractual agreements. In general, such fees aredeferred and recognized on a straight-line basis over the contract period. Wherethe contract period is not defined, such fees are recognized on a straight-linebasis over the estimated term, during which contractual benefits are expectedto be derived. If payment of such fees is contingent upon future performanceobligations of the Company or other future events, revenue recognition of suchamounts is deferred and recognized upon completion of the specific event.

 

### **(f)    Research and Development**

In accordance with SFAS No. 2,*Accounting for Research and Development Costs*,R&D costs are expensed in the period in which they are incurred. AcquiredR&D having no alternative future use is written off at the time ofacquisition. The cost of intangibles that are purchased from others for aparticular R&D project that have no alternative future use is written offat the time of acquisition.

 

### **(g)   Stock-Based Compensation**

In December 2004, theFinancial Accounting Standard Board (“FASB”) published SFAS No. 123R, *Share-Based Payments*. SFAS No. 123Ramends SFAS No. 123, *Stock-BasedCompensation* issued in 1995 and supersedes Accounting PrinciplesBoard Opinion (“APB”) No. 25 issued in 1972. Beginning on January 1,2006, the Company applied SFAS No. 123R using a modified version of theprospective application for the stock options granted. The financial statementsof prior interim periods and fiscal years do not reflect any restated amounts.Stock options are granted to employees and directors at exercise prices equalto the fair market value of the Company’s stock at the dates of grant. Stockoptions generally vest equally over three or seven years and have a term offive or ten years. Under the transition method, Compensation expense isgenerally recognized over the period during which an employee is required toprovide service in exchange for the award (usually the vesting period).Compensation cost is recognized beginning on the required effective date for 

 

F-10

----

 

the portion of outstandingawards for which the requisite service has not yet been rendered, based on thegrant-date fair value of those awards calculated under SFAS No. 123R foreither recognition or *pro forma*disclosures. The expenses recorded in selling, general and administration(“SG&A”) and recognized for the years ended December 31, 2007 and 2006were $1,202 and $968, respectively.

 

If this change in accountingpolicy had been applied to the fiscal year 2005, the Company’s net income,basic income per share and diluted income per share for the years ended December 31,2005 would have been reduced on a *pro forma* basisas follows:

 
| ** **                                     | ** ** | **2005** | ** ** |
|------------------------------------------------|------------|----------|------------|
|                                           |       |     |       |
| Net income, as reported                        |       | $        | 7,784      |   |
| *Pro forma impact*                             |       | (839     | )          |
| *Pro forma net income*                         |       | $        | 6,945      |   |
|                                           |       |     |       |
| Basic earnings per share,  as reported         |       | $        | 0.19       |   |
| *Pro forma impact per share*                   |       | $        | (0.02      | ) |
| *Pro forma earnings per share —  basic*   |       | $        | 0.17       |   |
| *Pro forma earnings per share —  diluted* |       | $        | 0.16       |   |

 

The estimated fair values ofgranted stock options for the years ended December 31, 2007, 2006 and 2005using the Black-Scholes option-pricing model with the following weighted-averageassumptions were as follows:

 
| ** **                     | ** ** | **2007**     | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------|------------|--------------|------------|----------|------------|----------|------------|
|                           |       |         |       |     |       |     |       |
| Dividend yield                 | ** ** | **0.0**      | **%**      | 0.0      | %          | 0.0      | %          |
| Expected volatility            | ** ** | **41**       | **%**      | 47       | %          | 58       | %          |
| Risk-free interest rate        | ** ** | **4.0**      | **%**      | 3.9      | %          | 3.6      | %          |
| Expected option life           | ** ** | **5  years** |       | 5  years |       | 6  years |       |
| Fair value per option  granted | ** ** | **$2.36**    |       | $1.99    |       | $2.74    |       |

 

The Black-Scholesoption-pricing model was developed for use in estimating the fair value oftraded options, which have no vesting restrictions and are fully transferableand which significantly differ from the Company’s stock option awards. Inaddition, option-pricing models require the input of highly subjectiveassumptions including the expected price volatility. The Company uses expectedvolatility rates that are based on historical volatility rates trended into futureyears. Changes in the subjective input assumptions can materially affect thefair value estimate, and therefore, the existing model does not necessarilyprovide a reliable single measure of the fair value of the Company’s stockoptions.

 

### **(h)   Income Taxes**

The liability method ofaccounting for income taxes is used in accordance with SFAS No. 109, *Accounting for Income Taxes*. Under thismethod, deferred tax assets and liabilities are recognized for the differencesbetween the financial statement and income tax bases of assets and liabilitiesand for operating losses and tax credit carryforwards. A valuation allowance isprovided for the portion of deferred tax assets that is more likely than not tobe unrealized. Deferred tax assets and liabilities are measured using enactedtax rates and laws.

 

 

F-11

----

 

The Canadian Federal andQuebec Provincial governments offer a tax incentive to companies performingR&D activities in Canada. The federal tax incentive is calculated based onpredetermined rates, considers eligible R&D expenditures and can be used toreduce federal income taxes in Canada otherwise payable. Such credits, if notused in the year earned, can be carried forward for a period of 20 years. TheQuebec Provincial government offers a similar incentive, except that it isreceivable in cash instead of a credit used to reduce taxes otherwise payable.The cash credit is awarded regardless of whether or not there are QuebecProvincial taxes payable. These investment tax credits are recorded as areduction of the income tax expense.

 

### **(i)    Cash and Cash Equivalents**

All highly liquidinvestments with original maturities of three months or less are classified ascash and cash equivalents. The fair value of cash and cash equivalentsapproximates the amounts shown in the financial statements.

 

### **(j)    Allowance for DoubtfulAccounts**

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

 

### **(k)   Inventories**

Inventories comprise rawmaterials, work-in-process and finished goods. Raw materials are valued at thelower of standard cost and replacement cost. Standard cost approximates actualcost, computed on a first-in, first-out basis. Work-in-process is valued at thelower of standard cost and net realizable value and includes material, directlabor and related manufacturing overhead costs. Finished goods are valued atthe lower of cost computed on a first-in, first-out basis, and net realizablevalue, and include all related manufacturing, packaging and overhead costs.Provisions for inventory obsolescence are charged against income when it isdetermined that the inventory item does not meet the defined quality orregulatory requirements for sale or is obsolete.

 

### **(l)    Property, Plant andEquipment**

Property, plant andequipment are reported at cost, less accumulated depreciation. The Companyprovides for depreciation using the following methods and applying rates toamortize the cost over the estimated useful life of the assets:

 
| Building           |   | straight-line over 25 years                                           |
|--------------------|--------|-----------------------------------------------------------------------|
| Equipment          |   | 20%—30% declining balance and straight-line over 5—10 years |
| Computer  software |   | straight-line over 7 years                                            |

 

Expenditures for constructionof assets incurred prior to productive use are reflected as assets underconstruction. Depreciation commences when an asset is substantially completedand ready for productive commercial use.

 

### **(m)  Goodwill**

Goodwill is not amortized;however, it is subject to an annual impairment test, or tested more frequentlyunder certain circumstances. The assessment of impairment is done annually at December 31,by applying a fair-value-based test. Measurement of the fair value of thereporting unit is based on one or more fair value measures, including presentvalue techniques of estimated future cash flows.

 

F-12

----

### **(n)   Intangible Assets**

Acquired intangible assetsthat do not have regulatory approval and for which there are no alternativeuses are expensed as acquired in-process R&D, and those that haveregulatory approval are capitalized. Amortization of intangibles assetscommence when its associated products are launched into the market forcommercial use.

 

Intangible assets withfinite lives are reported at cost, less accumulated amortization. The Companydoes not have any intangible assets with indefinite lives. The Company providesfor amortization on a straight-line basis over the following estimated usefullives:

 
| Patents  and trademarks |   | 10 years |
|-------------------------|--------|----------|
| Licenses                |   | 10 years |

### ** **

### **(o)   Impairment of Long-livedAssets**

Long-lived assets,principally comprising property, plant and equipment and intangible assets withfinite lives are reviewed for impairment whenever events or circumstancesindicate the carrying amount of assets may not be recoverable. The Companyevaluates recoverability of assets to be held and used by comparing theircarrying amount to the estimated future net undiscounted cash flows generatedby the assets. If such assets are considered to be impaired, the impairmentrecognized is measured as the amount by which the carrying amount of the assetsexceeds the fair value of the assets.

 

### **(p)   Recent AccountingPronouncements**

In February 2007, theFASB issued SFAS No. 159, *The FairValue Option for Financial Assets and Financial Liabilities*. Thisstatement permits entities to choose to measure many financial instruments andcertain other items at fair value. The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions. TheCompany is required to adopt the provisions of SFAS No. 159, effective January 1,2008. The Company does not anticipate that the election, if any, of thisfair-value option will have a material effect on the Consolidated FinancialStatements.

 

In September 2006, FASBissued SFAS No. 157, *Fair ValueMeasurements*. This statement provides guidance for using fair valueto measure assets and liabilities. It also responds to investors’ requests forexpanded information about the extent to which companies measure assets andliabilities at fair value, the information used to measure fair value, and theeffect of fair value measurements on earnings. SFAS No. 157 applieswhenever other standards require (or permit) assets or liabilities to bemeasured at fair value, and does not expand the use of fair value in any newcircumstances. The Company is required to adopt the provisions of SFAS No. 157,effective January 1, 2008. The Company does not believe that its adoptionwill have a material impact on the Company’s Consolidated Financial Statements.

 

## **NOTE3. CHANGE IN ACCOUNTING POLICY**

On January 1, 2007, theCompany adopted FASB Interpretation No. 48, “*Accountingfor Uncertainty in Income Taxes*” (“FIN 48”). FIN 48 prescribes aminimum recognition threshold that a tax position is required to meet beforebeing recognized in the financial statements and provides guidance onde-recognition, measurement classification, interest and penalties, accountingin interim periods, disclosure and transition matters.

 

The adoption of FIN 48 didnot impact the Company’s consolidated financial position, results of operationsor cash flows.

 

The Company’s policy is torecognize interest related to unrecognized tax benefits and penalties asfinancial expense. There were no interest or penalties accrued at December 31,2007.

 

 

F-13

----

 

As at January 1, 2007,the Company had provided $1.0 million of valuation allowance in the deferredtax asset accounts with respect to the tax filing position taken related to thedisposition of assets in prior years. The uncertainty arises from the fact thatthe tax treatment taken is subject to interpretation and it was more likelythan not at the time of filing that the position would be successfullychallenged by the taxation authorities. If the filing position is accepted bythe taxation authorities, the provision would be reversed into income as areduction in deferred income tax expense in the year of acceptance. The Companyexpects this matter to be resolved during 2008. The Company has not recordedany increases and decreases in unrecognized tax benefits as a result of taxpositions taken during the current period.

 

There are no other knownitems of a material nature with respect to uncertainty in income taxes.

 

The Company and itssubsidiaries’ income tax returns are subject to examination by tax authoritiesin the various jurisdictions where they are filed. Income tax returns for theyear ended December 31, 2007 will be filed during the first six months of2008.

 

## **NOTE 4.**FINANCIAL INCOME (EXPENSE)

 
| ** **                              | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest income                         | ** ** | **$**    | **939**    |     | $          | 521      |       | $ | 107 |   |
| Interest expense and  financial charges | ** ** | **(69**  | **)**      | (174     | )          | (136     | )          |
|                                    | ** ** | **$**    | **870**    |     | $          | 347      |       | $ | (29 | ) |

 

## **NOTE 5.**INCOME TAXES

 
| ** **                                                       | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| The components of income  tax (recovery) expense are as follows: |       |       |       |     |       |     |       |
| Current                                                          | ** ** | **$**      | **778**    |     | $          | 807      |       | $ | 788 |   |
| Deferred                                                         | ** ** | **(1,134** | **)**      | 3,227    |       | 765      |       |
|                                                             | ** ** | **$**      | **(356**   | **)**    | $          | 4,034    |       | $ | 1,553 |   |

 

The reported income taxexpense differs from the expected amount calculated by applying the Company’sCanadian combined federal and provincial tax rate to income before income taxexpense. The reasons for this difference and the related tax effects are asfollows:

 
| ** **                                                                 | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Income before income taxes  — primarily from the Canadian operations  | ** ** | **$**      | **1,302**  |     | $          | 15,581   |       | $ | 9,337 |   |
| Canadian combined federal  and provincial tax rate                         | ** ** | **32.0**   | **%**      | 32.4     | %          | 32.4     | %          |
| Expected income tax  expense                                               | ** ** | **$**      | **417**    |     | $          | 5,048    |       | $ | 3,026 |   |
| Increase (decrease)  resulting from:                                       |       |       |       |     |       |     |       |
| Foreign tax rate  differences                                              | ** ** | **94**     |       | 114      |       | 111      |       |
| Effects on deferred income  taxes from reduction in income tax rates       | ** ** | **165**    |       | 200      |       | —   |       |
| Reversal of deferred  income tax liability due to tax planning initiatives | ** ** | **(529**   | **)**      | (871     | )          | —   |       |
| Recognition of previously  unrecognized tax loss carryforwards             |       | —     |       | —   |       | (876     | )          |
| Goodwill and other  amortization                                           | ** ** | **—** |       | —   |       | 111      |       |
| Investment tax credits                                                     | ** ** | **(731**   | **)**      | (827     | )          | (642     | )          |
| Non-taxable capital gains  related to milestones                           | ** ** | **(156**   | **)**      | (63      | )          | (264     | )          |
| Other, mainly  non-deductible stock-based compensation costs               | ** ** | **384**    |       | 433      |       | 87       |       |
|                                                                       | ** ** | **($356**  | **)**      | $        | 4,034      |     | $          | 1,553 |   |

 

F-14

----

 

Deferred income tax assetshave been provided as follows:

 
| ** **                                                              | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Loss carryforwards and  undeducted R&D expenses                     | ** ** | **$**      | **7,569**  |     | $          | 8,166    |       | $ | 10,953 |   |
| Investment tax credits                                                  | ** ** | **1,982**  |       | 1,158    |       | 1,028    |       |
| Expenses not currently  deductible for tax purposes                     | ** ** | **1,110**  |       | 775      |       | 468      |       |
| Deferred revenue                                                        | ** ** | **745**    |       | 782      |       | 923      |       |
| Share issuance costs                                                    | ** ** | **138**    |       | 237      |       | 487      |       |
| Net book value in excess  of tax value of property, plant and equipment | ** ** | **—** |       | (1,152   | )          | (497     | )          |
| Net tax value in excess of  book value of property, plant and equipment | ** ** | **1,371**  |       | —   |       | —   |       |
| Tax value of intangible  assets in excess of net book value             | ** ** | **424**    |       | 747      |       | 643      |       |
| Total deferred tax assets                                               | ** ** | **13,339** |       | 10,713   |       | 14,005   |       |
| Valuation allowance                                                     | ** ** | **(3,007** | **)**      | (2,975   | )          | (2,788   | )          |
| Net deferred tax assets                                                 | ** ** | **$**      | **10,332** |     | $          | 7,738    |       | $ | 11,217 |   |
| Deferred income tax assets  are classified as follows:                  |       |       |       |     |       |     |       |
| Current                                                                 | ** ** | **$**      | **4,119**  |     | $          | 3,179    |       | $ | 2,750 |   |
| Non-current                                                             | ** ** | **6,213**  |       | 4,559    |       | 8,467    |       |
|                                                                    | ** ** | **$**      | **10,332** |     | $          | 7,738    |       | $ | 11,217 |   |

 

At December 31, 2007,the Company has accumulated tax losses of $11,685 available for federalpurposes and $8,306 for provincial purposes in Canada, which expire from 2008to 2015. In addition, the Company has $8,678 of undeducted scientific researchand experimental development expenditures in Canada as well as $6,727 inQuébec, which have no expiry. The Company also has $2,841 of unclaimed Canadianinvestment tax credits, which expire from 2012 to 2027. These losses,undeducted scientific research and experimental development expenditures andinvestment tax credits can be used to offset future years’ taxes payable.

 

The Company has accumulatedtax losses of $6,283 for federal and state purposes in the U.S., which expirefrom 2010 to 2014. Subject to certain limitations, these losses can be used tooffset future years’ taxable income.

 

In 2005, the Companyre-evaluated the tax rate applied to the temporary difference associated withcapital assets acquired in 2004.

 

As a result of tax planninginitiatives made possible by the purchase of the minority interest on April 22,2004, the Company was able to increase the value of its deferred income taxassets at December 31, 2004 and 2005 by recognizing the benefits ofpreviously unrecognized tax loss carryforwards and therefore decreasing thevaluation allowance.

 

The Company’s valuationallowance is made up of loss carryforwards in jurisdictions where taxableincome is no longer generated or where it is more likely they will not berealized prior to expiry.

 

F-15

----

## ** **

## **NOTE 6.**EARNINGS PER SHARE

Basic earnings per commonshare is calculated by dividing the net income by theweighted-average number of the Company’s common shares outstanding during theperiod. Diluted earnings per common share is calculated by dividing the netincome by the sum of the weighted-average number of common shares that wouldhave been outstanding if potentially dilutive common shares had been issuedduring the period. The treasury stock method is used to compute the dilutiveeffect of warrants and stock options. The calculation of diluted earnings percommon share excludes any potential conversion of warrants and options thatwould increase earnings per share.

 

The following table setsforth the computation of basic and diluted income per share for the years endedDecember 31:

 
| ** **                                                           | ** ** | **2007**       | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|
| Numerator:                                                           |       |           |       |       |       |       |       |
| Net income                                                           | ** ** | **$**          | **1,658**  |       | $          | 11,547     |       | $ | 7,784 |   |
| Denominator:                                                         |       |           |       |       |       |       |       |
| Weighted-average number of common shares outstanding — basic    | ** ** | **41,955,989** |       | 41,592,507 |       | 41,471,798 |       |
| Weighted-average effect of dilutive securities:                      |       |           |       |       |       |       |       |
| Stock options                                                        | ** ** | **140,261**    |       | 83,175     |       | 893,984    |       |
| Weighted-average number of  common shares outstanding — diluted | ** ** | **42,096,250** |       | 41,675,682 |       | 42,365,782 |       |
|                                                                 |       |           |       |       |       |       |       |
| Basic earnings per share                                             | ** ** | **$**          | **0.04**   |       | $          | 0.28       |       | $ | 0.19 |   |
| Diluted earnings per share                                           | ** ** | **$**          | **0.04**   |       | $          | 0.28       |       | $ | 0.18 |   |

## ** **

## **NOTE 7.** RESTRICTED CASH

An interest-bearingcompensating balance of $1,326 was provided to our third party payroll serviceprovider to guarantee payroll disbursements.

 

## **NOTE 8.** ACCOUNTS RECEIVABLE

| ** **                            | ** ** | **2007**   | ** ** | **2006** | ** ** |
|---------------------------------------|------------|------------|------------|----------|------------|
| Trade                                 | ** ** | **$**      | **18,297** |     | $          | 20,686 |   |
| Allowance for doubtful  accounts      | ** ** | **(238**   | **)**      | (454     | )          |
| Income taxes and R&D  tax credits | ** ** | **—** |       | 451      |       |
|                                  | ** ** | **$**      | **18,059** |     | $          | 20,683 |   |

 

Long-term receivables relateto a major customer sales contract and will bear interest per terms of theagreement, which is not less than market rate, and which arerepayable beginning in 2009 as commercial production commences.

 

## **NOTE 9.**INVENTORIES

| ** **      | ** ** | **2007**  | ** ** | **2006** | ** ** |
|-----------------|------------|-----------|------------|----------|------------|
| Raw materials   | ** ** | **$**     | **4,707**  |     | $          | 3,682 |   |
| Work-in-process | ** ** | **1,330** |       | 1,094    |       |
| Finished goods  | ** ** | **3,583** |       | 2,814    |       |
|            | ** ** | **$**     | **9,620**  |     | $          | 7,590 |   |

##  

 

F-16

----

## ** **

## **NOTE 10.**PROPERTY, PLANT AND EQUIPMENT

 
| ** **                | ** ** | **2007**    | ** ** | **2006** | ** ** |
|---------------------------|------------|-------------|------------|----------|------------|
| Land                      | ** ** | **$**       | **2,834**  |     | $          | 2,419 |   |
| Building                  | ** ** | **20,897**  |       | 17,393   |       |
| Computer software         | ** ** | **7,774**   |       | 3,794    |       |
| Equipment                 | ** ** | **49,286**  |       | 41,930   |       |
| Assets under construction | ** ** | **9,147**   |       | 4,689    |       |
|                      | ** ** | **89,938**  |       | 70,225   |       |
| Accumulated depreciation  | ** ** | **(31,444** | **)**      | (23,933  | )          |
|                      | ** ** | **$**       | **58,494** |     | $          | 46,292 |   |

 

Depreciation of property,plant and equipment was $5,696, $4,860 and $4,200, for the years ended December 31,2007, 2006 and 2005, respectively.

 

## **NOTE 11.**INTANGIBLE ASSETS

 
| ** **             | ** ** | ** ** | ** ** | ** **       | ** ** | **2007**     | ** ** |
|------------------------|------------|------------|------------|------------------|------------|--------------|------------|
|                   | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | **Net Book** | ** ** |
|                   | ** ** | **Cost**   | ** ** | **Amortization** | ** ** | **Value**    | ** ** |
| Patents and trademarks | ** ** | **$**      | **536**    | ** **       | **$**      | **536**      | ** ** | **$** | **—** | ** ** |
| Licenses               | ** ** | **2,582**  | ** ** | **2,342**        | ** ** | **240**      | ** ** |
| Other                  | ** ** | **252**    | ** ** | **252**          | ** ** | **—**   | ** ** |
|                   | ** ** | **$**      | **3,370**  | ** **       | **$**      | **3,130**    | ** ** | **$** | **240** | ** ** |
| ** **             | ** ** | ** ** | ** ** | ** **       | ** ** | **2006**     | ** ** |
| ** **             | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | **Net Book** | ** ** |
| ** **             | ** ** | **Cost**   | ** ** | **Amortization** | ** ** | **Value**    | ** ** |
| Patents and trademarks |       | $          | 457        |             | $          | 434          |       | $ | 23 |   |
| Licenses               |       | 2,173      |       | 1,889            |       | 284          |       |
| Other                  |       | 215        |       | 204              |       | 11           |       |
|                   |       | $          | 2,845      |             | $          | 2,527        |       | $ | 318 |   |

 

Amortization of intangibleassets was $145, $275 and $345, for the years ended December 31, 2007,2006 and 2005, respectively. The aggregate amortization foreach of the five succeeding fiscal years are as follows: 2008 - $24;2009 - $24; 2010 - $24; 2011 - $24; 2012 - $24.

 

## **NOTE 12.**ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 
| ** **             | ** ** | **2007**  | ** ** | **2006** | ** ** |
|------------------------|------------|-----------|------------|----------|------------|
| Trade                  | ** ** | **$**     | **6,575**  |     | $          | 4,688 |   |
| Accrued liabilities    | ** ** | **2,313** |       | 905      |       |
| Employee-related items | ** ** | **3,016** |       | 5,347    |       |
|                   | ** ** | **$**     | **11,904** |     | $          | 10,940 |   |

 

F-17

----

## ** **

## **NOTE 13.**DEFERRED REVENUES

 
| ** **      | ** ** | ** **   | ** ** | ** **       | ** ** | ** **  | ** ** | ** **  | ** ** | **2007**   | ** ** |
|-----------------|------------|--------------|------------|------------------|------------|-------------|------------|-------------|------------|------------|------------|
| ** **      | ** ** | ** **   | ** ** | ** **       | ** ** | ** **  | ** ** | **Less:**   | ** ** | ** ** | ** ** |
| ** **      | ** ** | **Deferred** | ** ** | **Accumulated**  | ** ** | ** **  | ** ** | **Current** | ** ** | **Long-**  | ** ** |
| ** **      | ** ** | **Revenues** | ** ** | **Amortization** | ** ** | **Net**     | ** ** | **Portion** | ** ** | **Term**   | ** ** |
| *Anipryl®* | ** ** | **$**        | **29,893** | ** **       | **$**      | **(29,180** | **)**      | **$**       | **713**    | ** ** | **$**      | **119** | ** ** | **$** | **594** | ** ** |
| Other           | ** ** | **292**      | ** ** | **—**       | ** ** | **292**     | ** ** | **292**     | ** ** | **—** | ** ** |
|            | ** ** | **$**        | **30,185** | ** **       | **$**      | **(29,180** | **)**      | **$**       | **1,005**  | ** ** | **$**      | **411** | ** ** | **$** | **594** | ** ** |
| ** **      | ** ** | ** **   | ** ** | ** **       | ** ** | ** **  | ** ** | ** **  | ** ** | **2006**   | ** ** |
| ** **      | ** ** | ** **   | ** ** | ** **       | ** ** | ** **  | ** ** | **Less:**   | ** ** | ** ** | ** ** |
| ** **      | ** ** | **Deferred** | ** ** | **Accumulated**  | ** ** | ** **  | ** ** | **Current** | ** ** | **Long-**  | ** ** |
| ** **      | ** ** | **Revenues** | ** ** | **Amortization** | ** ** | **Net**     | ** ** | **Portion** | ** ** | **Term**   | ** ** |
| *Anipryl®* |       | $            | 29,893     |             | $          | (29,067     | )          | $           | 826        |       | $          | 114 |   | $ | 712 |   |
| Other           |       | 215          |       | —           |       | 215         |       | 215         |       | —     |       |
|            |       | $            | 30,108     |             | $          | (29,067     | )          | $           | 1,041      |       | $          | 329 |   | $ | 712 |   |

 

Amortization of deferredrevenues totalled $120, $3,301 and $3,701 for the years ended December 31,2007, 2006, and 2005, respectively.

 

***Anipryl®***

In December 1997, theCompany entered into an alliance with Pfizer Inc. (“Pfizer”), whereby Pfizerwas 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 researchcollaboration.

 

In December 1999, theCompany and Pfizer amended the terms of the alliance (the “First Amendment”)whereby $9,000 of potential additional non-refundable fees were eliminated inexchange for the Company receiving additional regulatory support for apotential new indication and additional manufacturing data. These potentialadditional non-refundable fees would have become payable if Pfizer hadexercised its right to acquire product registrations following regulatoryapproval of *Anipryl*® in designatedEuropean countries.

 

In December 2001, theCompany and Pfizer further amended the terms of the alliance (the “SecondAmendment”) whereby the Company received a payment of $3,150 in respect ofminimum royalty entitlements for the second and third three-year periods endingDecember 31, 2001 and 2002 and modifications to future royaltyentitlements. The Second Amendment also resulted in all rights to *Anipryl*® outside of North America reverting backto the Company, forfeiture of any additional minimum royalty entitlements andthe termination of any future collaborative research on new indications orformulations for *Anipryl*®.

 

Under the amendedarrangement, the Company is not entitled to receive any additionalnon-refundable fees. The $28,090 in non-refundable fees already received fromPfizer have been deferred and are being recognized asrevenue on a straight-line basis over the period to December 31, 2006.

 

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

 

The portion of the $3,150payment referable to the minimum royalty entitlement for the three-year periodending December 31, 2001 was earned and recognized as revenue in thefourth quarter of 2001. The portion referable to the third year in thethree-year period ending 

 

F-18

----

 

December 31, 2002 wasdeferred and recognized as revenue on a straight-line basis during 2002.

 

## **NOTE 14.**CREDIT FACILITIES

The Company chose not torenew its credit facilities upon their scheduled expiration date in June 2007.The Company plans to explore new credit facility arrangements in conjunctionwith new business opportunities. The Company believes that its current cashposition and cash flows are sufficient to meet the Company’s business needs.

 

## **NOTE 15.**OTHER LIABILITIES

Other liabilities comprisethe following:

 

**(a)**          In 2005, in connection withthe discontinuance of the brachytherapy product line, the Company recorded inSG&A expenses an amount of $457, of which $252 is payable in quarterlyinstallments of $19, with the first payment due on April 30, 2006 and thefinal payment due on January 31, 2010.

 

**(b)**          Incentive plans whichprovide for cash payments to be made in the future to eligible participants arebased on achievement of certain targets within the year.

 

## **NOTE 16.**CUSTOMER FINANCING

During 2007, the Companyreceived $3.1 million in U.S. dollar-denominated customer financing related tocapital installation activities and technical transfer fees under the Company’snew contract with a major customer. The customer financing will be drawn downas commercial batches are produced under the contract. The customer financingwill be secured by the specific capital installations made in preparation forthis contract.

 

## **NOTE 17.**SHAREHOLDERS’ EQUITY

 

### **(a)   Common Share Offering**

On April 22, 2004, theCompany closed its offering of 3,053,436 units at a price of $4.82 (CDN$6.55)per unit for proceeds net of related expenses of $13,385 (CDN$18,213). Eachunit consisted of one common share and one-half of one share purchase warrant.Each whole warrant entitled the holder to acquire one common share of theCompany at a price of CDN$8.50 at any time prior to April 24, 2006. Included as a component of shareholders’ equity was $916, whichrepresented the fair value of the warrants issued. The fair value of thewarrants was determined based on the price of the offering using the Black-Scholesoption-pricing model. All warrants expired unexercised on April 24, 2006.

 

### **(b)   Stock Repurchase Program**

On December 7, 2005,the Board of Directors of the Company authorized the repurchase forcancellation of up to 3,522,530 of its common shares through a Normal CourseIssuer Bid (the “2005 Issuer Bid”), which represented 10% of the public floaton December 6, 2005. In accordance with the rules of the TSX, suchpurchases could begin on December 15, 2005 and end no later than December 14,2006.

 

During 2006, 713,200 shareswere purchased and cancelled in accordance with the 2005 Issuer Bid at anaverage price of $4.59 for total consideration of $3,277. The excess of $1,779over the stated capital of the acquired shares was deducted from additional paid-incapital.

 

The Company receivedapproval from the TSX on December 18, 2006 to renew its Normal CourseIssuer Bid (the “2006 Issuer Bid”). DRAXIS was authorized to repurchase up to3,397,011 of its common shares, which represented 10% of the 33,970,112 commonshares 

 

F-19

----

 

in the publicfloat as of December 14, 2006, beginning on December 20, 2006 anduntil December 19, 2007 or until such earlier date when the Companypurchases the maximum allowable number of shares or elects to terminate thebid. All shares purchased will be acquired through the facilities of the TSXand will be cancelled.

 

No shares were purchased in2006 in accordance with the 2006 Issuer Bid. During 2007, 130,100 shares werepurchased and cancelled in accordance with the 2006 Issuer Bid at an averageprice of $5.27 for total consideration of $686. The excess of $368 over thestated capital of the acquired shares was deducted from additional paid-incapital.

 

DRAXIS has received approvalfrom the TSX for its Normal Course Issuer Bid (the “2008 Issuer Bid”) topurchase up to 4,072,054 common shares, which represent approximately 10% ofthe 40,720,539 common shares in the public float as at January 14, 2008.

 

The 2008 Issuer Bid will endno later than January 20, 2009 or earlier if the Company purchases themaximum allowable number of shares. All shares will be purchased through thefacilities of the TSX and will be cancelled. Subject to any block purchases made in accordance with the rules ofthe TSX, the Company is subject to a daily repurchase restriction of 23,084common shares, which represents 25% of the average daily trading volume of theCompany’s common shares for the six months ended December 31, 2007.

 

Any purchases made pursuantto the 2008 Issuer Bid will be made in accordance with the rules of theTSX and will be made at the market price of the common shares at the time ofthe acquisition.

 

## **NOTE 18.**STOCK-BASED COMPENSATION PLANS

## ** **

### **(a)   Stock Option Plan**

On May 18, 2006, theshareholders approved a stock option plan referred to as the “2006 Stock OptionPlan” to permit the Board of Directors to grant options to purchase commonshares to directors, officers and employees of the Company and subsidiaries inorder to encourage these persons to work towards and participate in the growthand development of the Company and its subsidiaries. The Board of Directorsdetermines the exercise price per common share; the number of options forcommon shares that may be allotted to each designated director, officer oremployee; the period during which any option may be exercised; and all theterms and conditions of the option in accordance with the applicablerequirements of any relevant regulatory authority or stock exchange. Theoptions are exercisable for a period not exceeding ten years from the date ofthe grant, and generally, options vest one-third on each of the first, secondand third anniversaries of the date of grant. The maximum number of options forissuance under the 2006 Stock Option Plan is 1,500,000.

 

On February 3, 1988 andamended on June 27, 2001, the shareholders approved a stock option planreferred to as “Stock Option Plan of DRAXIS Health Inc.” to permit the Board ofDirectors to grant options to purchase common shares to directors, officers,employees and arm’s length consultants of the Company and its subsidiaries, soas to link corporate compensation to enhanced shareholder value. The Board ofDirectors determines the price per common share; the number of options forcommon shares that may be allotted to each designated director, officer,employee or arm’s length consultant; the period during which any option may beexercised; and all the terms and conditions of the option in accordance withthe applicable requirements of any relevant regulatory authority or stock exchange.The options are exercisable for a period not exceeding 10 years from the dateof the grant and generally options vest one-third on each of the first, secondand third anniversaries of the date of grant. The maximum number of options forissuance under the Stock Option Plan of DRAXIS Health Inc. is 7,500,000. Noadditional options are available for granting under this plan since the 2006Stock Option Plan was adopted on May 18, 2006.

 

 

F-20

----

 

The Company has adopted aguideline limiting the aggregate number of common shares that can be issued atany point in time, through the exercise of options, to 13% of the Company’soutstanding common shares. As at December 31, 2007, theaggregate number of shares issuable pursuant to outstanding options represented4.5% (2006 — 5.4%) of the outstanding common shares.

 

The following is a summaryof the number of common shares issuable pursuant to outstanding stock options:

 
| ** **                                                                    | ** ** | ** **     | ** ** | ** ** | ** ** | **Outstanding** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------|------------|------------|------------|-----------------|------------|
| ** **                                                                    | ** ** | **2007**       | ** ** | **2006**   | ** ** | **2005**        | ** ** |
|                                                                          |       |           |       |       |       |            |       |
| Balance, beginning of year                                                    | ** ** | **2,257,995**  |       | 2,652,620  |       | 2,753,232       |       |
| Increase (decrease)  resulting from:                                          |       |           |       |       |       |            |       |
| Granted                                                                       | ** ** | **420,000**    |       | 330,000    |       | 565,000         |       |
| Exercised                                                                     | ** ** | **(670,500**   | **)**      | (647,333   | )          | (648,279        | )          |
| Cancelled                                                                     | ** ** | **(131,667**   | **)**      | (26,667    | )          | (17,333         | )          |
| Expired                                                                       | ** ** | **—**     |       | (50,625    | )          | —          |       |
| Balance, end of year                                                          | ** ** | **1,875,828**  |       | 2,257,995  |       | 2,652,620       |       |
|                                                                          |       |           |       |       |       |            |       |
| Exercisable at  December 31                                              | ** ** | **913,328**    |       | 1,310,495  |       | 1,501,898       |       |
|                                                                          |       |           |       |       |       |            |       |
| As of December 31:                                                       |       |           |       |       |       |            |       |
| Remaining unrecognized  compensation cost related to non-vested stock options | ** ** | **$**          | **1,408**  |       | $          | 1,708           |       | $ | 2,014 |   |
| Weighted-average remaining  requisite service period                          | ** ** | **1.7  years** |       | 1.9  years |       | 2.8  years      |       |
|                                                                          |       |           |       |       |       |            |       |
| Weighted-average exercise  price of options:                                  |       |           |       |       |       |            |       |
| Outstanding, end of year                                                      | ** ** | **CDN$4.76**   |       | CDN$4.23   |       | CDN$3.94        |       |
| Exercisable, end of year                                                      | ** ** | **CDN$5.21**   |       | CDN$4.30   |       | CDN$3.65        |       |
| Granted                                                                       | ** ** | **CDN$5.69**   |       | CDN$5.06   |       | CDN$5.79        |       |
| Exercised                                                                     | ** ** | **CDN$3.49**   |       | CDN$3.41   |       | CDN$3.07        |       |
| Cancelled                                                                     | ** ** | **CDN$5.17**   |       | CDN$6.20   |       | CDN$5.06        |       |
| Expired                                                                       | ** ** | **—**     |       | CDN$3.33   |       | —          |       |
|                                                                               |            |                |            |            |            |                 |            |  |  |  |

 

F-21

----

 

The following tablesummarizes information about stock options outstanding at December 31,2007:

 
| ** **                   | ** ** | ** **              | ** ** | ** **                                                           | ** ** | **Options  Outstanding**                  | ** ** | ** **                                        | ** ** | ** **              | ** ** | **Options  Exercisable**                                             | ** ** |
|------------------------------|------------|-------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------------|------------|---------------------------------------------------|------------|-------------------------|------------|----------------------------------------------------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Number  Outstanding** | ** ** | **Weighted-  Average   Remaining   Contractual   Life   (in years)** | ** ** | **Weighted-  Average   Exercise   Price** | ** ** | **Aggregate    Intrinsic   Value  ($000’s)** | ** ** | **Number  Exercisable** | ** ** | **Weighted-  Average   Remaining   Contractual   Life   (in years)** | ** ** | **Weighted-  Average   Exercise   Price** | ** ** | **Aggregate    Intrinsic   Value  ($000’s)** | ** ** |
| CDN$2.01—$2.50          |       | 355,001                 |       | 5.47                                                                 |       | CDN$2.36                                  |       | CDN$1,403                                         |       | 5,001                   |       | 0.62                                                                 |       | CDN$2.30 |   | CDN$20 |   |
| CDN$2.51—$3.00          |       | 37,500                  |       | 5.62                                                                 |       | CDN$2.63                                  |       | CDN$138                                           |       | —                  |       | —                                                               |       | — |   | — |   |
| CDN$3.01—$3.50          |       | 15,000                  |       | 0.84                                                                 |       | CDN$3.25                                  |       | CDN$46                                            |       | 15,000                  |       | 0.84                                                                 |       | CDN$3.25 |   | CDN$46 |   |
| CDN$3.51—$4.00          |       | —                  |       | —                                                               |       | —                                    |       | —                                            |       | —                  |       | —                                                               |       | — |   | — |   |
| CDN$4.01—$4.50          |       | 125,000                 |       | 1.00                                                                 |       | CDN$4.30                                  |       | CDN$251                                           |       | 125,000                 |       | 1.00                                                                 |       | CDN$4.30 |   | CDN$251 |   |
| CDN$4.51—$5.00          |       | 130,000                 |       | 1.61                                                                 |       | CDN$4.70                                  |       | CDN$209                                           |       | 130,000                 |       | 1.61                                                                 |       | CDN$4.70 |   | CDN$209 |   |
| CDN$5.01—$6.65          |       | 1,213,327               |       | 3.64                                                                 |       | CDN$5.58                                  |       | CDN$895                                           |       | 638,327                 |       | 2.67                                                                 |       | CDN$5.52 |   | CDN$507 |   |
|                         |       | 1,875,828               |       | 3.70                                                                 |       | CDN$4.76                                  |       | CDN$2,942                                         |       | 913,328                 |       | 2.26                                                                 |       | CDN$5.21 |   | CDN$1,034 |   |

### ** **

### **(b)   Deferred Share Unit Plan**

Under the Company’s DeferredShare Unit Plan, members of senior management can elect to receive up to 20% ofbase salary and up to 100% of any bonus payable in respect of that year indeferred share units (“DSUs”) in lieu of cash compensation. An election must bemade by December 1 of each year in respect of base salary and bonus forthe following year. The elected amount is converted to a number of DSUs equalto the elected amount divided by the closing price of the common shares on theTSX or NASDAQ on December 31 of each year, based on a purchase commitmentas of December 1 of the prior year. Participants are not entitled toredeem any DSUs until cessation of employment with the Company for any reason.The value of each DSU redeemable by the participants will be equivalent to themarket value of a common share at the time of redemption. The DSUs must beredeemed no later than the end of the first calendar year commencing after thedate of cessation of employment. The DSU liability is re-measured at the end ofeach reporting period based on the market price of the Company’s common stock.The net increase or decrease in the value of the DSUs is recorded ascompensation cost included in SG&A expense.

 

The following summarizes thenumber of DSUs issued and outstanding and their impact on SG&A:

 
| ** **                 | ** ** | **2007**    | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------|------------|-------------|------------|----------|------------|----------|------------|
| Balance, beginning of year | ** ** | **230,447** |       | 199,868  |       | 190,313  |       |
| Issued                     | ** ** | **—**  |       | 30,579   |       | 9,555    |       |
| Cancelled                  | ** ** | **(429**    | **)**      | —   |       | —   |       |
| Balance, end of year       | ** ** | **230,018** |       | 230,447  |       | 199,868  |       |
|                       | ** ** | ** **  |       |     |       |     |       |
| DSU (recovery) expense     | ** ** | **$**       | **(383**   | **)**    | $          | 245      |       | $ | (117 | ) |
|                            |            |             |            |          |            |          |            |  |  |  |

 

F-22

----

## ** **

## **NOTE 19.**SEGMENTED INFORMATION AND MAJOR CUSTOMERS

## ** **

### **Industry Segmentation**

For purposes of operatingdecision-making and assessing performance, management considers that itoperates in three segments: Radiopharmaceuticals, Manufacturing, and Corporateand Other. Executive management assesses theperformance of each segment based on segment income. The segments areidentified as reporting segments based on the distinct management teams,customer base, production process and regulatory requirements of each. TheCorporate and Other segment includes revenues earned via royalties andmilestones, inter-segment eliminations and corporate expenses. The accountingpolicies used to determine segmented results and measure segmented assets arethe same as those described in the significant accounting policies.

 
| **Years ended December 31**                 | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **PRODUCT SALES REVENUES**                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Radiopharmaceuticals                             | ** ** | **$**      | **23,216** |       | $          | 21,508     |       | $ | 19,290 |   |
| Manufacturing                                    | ** ** | **54,926** |       | 64,731     |       | 54,743     |       |
| Corporate and Other                              | ** ** | **(2,070** | **)**      | (2,694     | )          | (1,044     | )          |
|                                             | ** ** | **$**      | **76,072** |       | $          | 83,545     |       | $ | 72,989 |   |
| **ROYALTY AND LICENSING REVENUES**               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Radiopharmaceuticals                             | ** ** | **$**      | **—** |       | $          | (3         | )          | $ | 9 |   |
| Manufacturing                                    | ** ** | **—** |       | —     |       | —     |       |
| Corporate and Other                              | ** ** | **2,788**  |       | 5,425      |       | 6,435      |       |
|                                             | ** ** | **$**      | **2,788**  |       | $          | 5,422      |       | $ | 6,444 |   |
| **TOTAL REVENUES**                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Radiopharmaceuticals                             | ** ** | **$**      | **23,216** |       | $          | 21,505     |       | $ | 19,299 |   |
| Manufacturing                                    | ** ** | **54,926** |       | 64,731     |       | 54,743     |       |
| Corporate and Other                              | ** ** | **718**    |       | 2,731      |       | 5,391      |       |
|                                             | ** ** | **$**      | **78,860** |       | $          | 88,967     |       | $ | 79,433 |   |
| **PRODUCT GROSS MARGIN**                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Radiopharmaceuticals                             | ** ** | **$**      | **12,976** |       | $          | 13,433     |       | $ | 11,593 |   |
| Manufacturing                                    | ** ** | **13,390** | **(1)**    | 23,215     |       | 14,628     |       |
| Corporate and Other                              | ** ** | **88**     |       | (186       | )          | (68        | )          |
|                                             | ** ** | **$**      | **26,454** |       | $          | 36,462     |       | $ | 26,153 |   |
| **SELLING, GENERAL AND  ADMINISTRATION EXPENSE** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Radiopharmaceuticals                             | ** ** | **$**      | **5,382**  |       | $          | 4,380      |       | $ | 4,660 |   |
| Manufacturing                                    | ** ** | **6,362**  |       | 6,487      |       | 5,086      |       |
| Corporate and Other(2)                           | ** ** | **7,063**  |       | 8,558      |       | 6,439      |       |
|                                             | ** ** | **$**      | **18,807** |       | $          | 19,425     |       | $ | 16,185 |   |
| **RESEARCH AND DEVELOPMENT  EXPENSE**            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Radiopharmaceuticals                             | ** ** | **$**      | **2,446**  |       | $          | 2,372      |       | $ | 2,103 |   |
| Manufacturing                                    | ** ** | **—** |       | —     |       | —     |       |
| Corporate and Other                              | ** ** | **—** |       | —     |       | —     |       |
|                                             | ** ** | **$**      | **2,446**  |       | $          | 2,372      |       | $ | 2,103 |   |
| **SEGMENT INCOME (LOSS)(3)**                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Radiopharmaceuticals                             | ** ** | **$**      | **5,148**  |       | $          | 6,678      |       | $ | 4,839 |   |
| Manufacturing                                    | ** ** | **7,028**  |       | 16,728     |       | 9,542      |       |
| Corporate and Other                              | ** ** | **(4,187** | **)**      | (3,319     | )          | (72        | )          |
|                                             | ** ** | **$**      | **7,989**  |       | $          | 20,087     |       | $ | 14,309 |   |

 

F-23

----

 
|                              |       |       |       |       |       |       |       |
|-----------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **DEPRECIATION AND AMORTIZATION** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Radiopharmaceuticals              | ** ** | **$**      | **1,096**  |       | $          | 1,110      |       | $ | 1,047 |   |
| Manufacturing                     | ** ** | **4,390**  |       | 3,688      |       | 3,105      |       |
| Corporate and Other               | ** ** | **355**    |       | 337        |       | 393        |       |
|                              | ** ** | **$**      | **5,841**  |       | $          | 5,135      |       | $ | 4,545 |   |
| **OPERATING INCOME (LOSS)(4)**    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Radiopharmaceuticals              | ** ** | **$**      | **4,052**  |       | $          | 5,568      |       | $ | 3,792 |   |
| Manufacturing                     | ** ** | **2,638**  |       | 13,040     |       | 6,437      |       |
| Corporate and Other               | ** ** | **(4,542** | **)**      | (3,656     | )          | (465       | )          |
|                              | ** ** | **$**      | **2,148**  |       | $          | 14,952     |       | $ | 9,764 |   |

 

### **Identifiable Assets**

 
| ** **           | ** ** | **2007**   | ** **  | **2006** | ** ** | **2005** | ** ** |
|----------------------|------------|------------|-------------|----------|------------|----------|------------|
| Radiopharmaceuticals | ** ** | **$**      | **19,560**  |     | $          | 15,332   |       | $ | 12,340 |   |
| Manufacturing        | ** ** | **68,117** |        | 54,162   |       | 52,664   |       |
| Corporate and Other  | ** ** | **40,257** |        | 36,468   |       | 30,816   |       |
|                 | ** ** | **$**      | **127,934** |     | $          | 105,962  |       | $ | 95,820 |   |

 

### **Geographic Segmentation**

 
| ** **      | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-----------------|------------|------------|------------|------------|------------|------------|------------|
| **REVENUES(5)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Canada          | ** ** | **$**      | **36,061** |       | $          | 39,891     |       | $ | 39,026 |   |
| United States   | ** ** | **40,336** |       | 47,900     |       | 39,612     |       |
| Other           | ** ** | **2,463**  |       | 1,176      |       | 795        |       |
|            | ** ** | **$**      | **78,860** | ** ** | $          | 88,967     |       | $ | 79,433 |   |

* *

*(1) Includes $517 ofinsurance proceeds related to a business interruption claim filed resultingfrom equipment damage during the 2005 shutdown period.*

* *

*(2) Stock-basedcompensation expense was recorded in SG&A expense of $1,202 in 2007 (2006 —$968; 2005 — $nil).*

* *

*(3) Income (loss)before depreciation and amortization, financial income (expense), foreignexchange (loss) gain and income taxes.*

* *

*(4) Income (loss)before financial income (expense), foreign exchange (loss) gain and incometaxes.*

* *

*(5) Revenues areattributable to countries based upon the location of the customer.*

* *

### **Long-Lived Assets**

Substantially all of the Company’sproperty, plant and equipment, goodwill and intangible assets are located inCanada. Goodwill is recorded within the radiopharmaceutical segment.

 

F-24

----

 
| ***Expenditures for Property,  Plant and Equipment*** | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|
| Radiopharmaceuticals                                  | ** ** | **$**      | **1,243**  |     | $          | 1,434    |       | $ | 461 |   |
| Manufacturing                                         | ** ** | **9,063**  |       | 4,222    |       | 4,119    |       |
| Corporate and Other                                   | ** ** | **19**     |       | —   |       | 39       |       |
| ** **                                            | ** ** | **$**      | **10,325** |     | $          | 5,656    |       | $ | 4,619 |   |
|                                                  |       |       |       |     |       |     |       |
| ***Product  Sales Revenues By Major Product Groups*** | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** |       |
| Radiopharmaceuticals                                  | ** ** | **$**      | **23,216** |     | $          | 21,508   |       | $ | 19,290 |   |
| Manufacturing – Sterile                          | ** ** | **38,620** |       | 51,529   |       | 41,488   |       |
| Manufacturing – Non  Sterile                     | ** ** | **16,306** |       | 13,202   |       | 13,255   |       |
| Corporate and Other                                   | ** ** | **686**    |       | 295      |       | 499      |       |
| Inter-segment eliminations                            | ** ** | **(2,756** | **)**      | (2,989   | )          | (1,543   | )          |
|                                                  | ** ** | **$**      | **76,072** |     | $          | 83,545   |       | $ | 72,989 |   |
|                                                  |       |       |       |     |       |     |       |
| ***Major  Customers***                                | ** ** | **2007**   | ** ** | **2006** | ** ** | **2005** |       |
| Customer A – Manufacturing                       | ** ** | **15.0**   | **%**      | 23.0     | %          | 23.0     | %          |
| Customer B – Manufacturing                       | ** ** | **19.0**   | **%**      | 23.0     | %          | 22.0     | %          |
| Customer C – Manufacturing                       | ** ** | **11.0**   | **%**      | 10.0     | %          | 13.0     | %          |
| Customer D –  Radiopharmaceuticals               | ** ** | **10.0**   | **%**      | 9.0      | %          | 9.0      | %          |
|                                                  | ** ** | **55.0**   | **%**      | 65.0     | %          | 67.0     | %          |

 

## **NOTE 20.**COMMITMENTS AND CONTINGENCIES

## ** **

### **Operating Leases and Service Contracts**

The operating leases relateto the rental of warehousing and parking facilities. Service contracts relateto a portion of information services outsourced to a third party.

 

The Company is committedunder various contractual commitments requiring minimum annual payments asfollows:

 
| ** **                     | ** ** | ** ** | ** ** | **Payment  due by end of:** | ** ** |
|--------------------------------|------------|------------|------------|-----------------------------|------------|
| ** **                     |       | **Total**  | ** ** | **2008**                    | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** |   |
| **Contractual Obligations**    | ** ** | ** ** | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating leases               |       | 3,955      |       | 399                         |       | 595 |   | 570 |   | 566 |   | 566 |   | 1,259 |   |
| Service contracts              |       | 1,339      |       | 591                         |       | 358 |   | 193 |   | 124 |   | 60 |   | 13 |   |
| Total contractual  obligations |       | 5,294      |       | 990                         |       | 953 |   | 763 |   | 690 |   | 626 |   | 1,272 |   |

 

All contractual obligationsrelated to 2007 and 2006 were fully paid as of December 31, 2007 and December 31,2006, respectively.

 

### **Legal Proceedings**

From time to time, theCompany becomes involved in legal proceedings and claims that arise in theordinary course of business.

 

 

F-25

----

 

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

 

On July 22, 2005, theCompany announced that, together with other defendants, it had received aStatement of Claim filed before the Superior Court of Justiceof Ontario wherein the plaintiff alleges that *Permax*®,a drug that the Company distributed in Canada for a third-party manufacturerprior to July 2003, causes “compulsive/obsessive behaviour, includingpathological gambling.” The plaintiff is seeking to have this actioncertified as a class action.  The Companybelieves this claim against it is without merit and intends to vigorouslydefend this proceeding and any motion for certification.  Prior to July 2003, *Permax*®was distributed in Canada by DRAXIS Pharmaceutica, the Canadian pharmaceuticalsales and marketing division of the Company. In July 2003, the Companycompleted the divestiture of the DRAXIS Pharmaceutica division to Shire. Noprovisions have been taken pursuant to this claim.

 

On February 29, 2008,the plaintiff served an Amended Statement of Claim and a Motion Record insupport of the plaintiff’s motion for certification of this action as a classproceeding.  It is anticipated that aclass proceedings judge will be assigned to this action on March 20, 2008,and that the assigned class proceedings judge will set a schedule forcompletion of the remaining pre-certification steps and for the certificationmotion.

 

## **NOTE 21.**RELATED PARTY TRANSACTIONS

## ** **

Significant related partytransactions and balances in the accompanying financial statements are asfollows:

 
| ** **                                                                                                      | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Rent paid to a company  jointly controlled by a member of the Board of Directors included in SG&A  expenses | ** ** | **$**    | **131**    |     | $          | 127      |       | $ | 123 |   |
|                                                                                                                 |            |          |            |          |            |          |            |  |  |  |

 

The aforementionedtransaction is in the normal course of operations, is measured at the exchangeamount, which is the amount of consideration established and agreed to by therelated parties, and has been fully paid as of the balance sheet dates.

 

## **NOTE 22.**FINANCIAL INSTRUMENTS

## ** **

### **Fair Value**

The fair values of cash andcash equivalents, restricted cash, accounts receivable, accounts payable andaccrued liabilities approximate their carrying values because of the short-termmaturity of those instruments. The Company is not party to any derivativeinstruments. The carrying amount of our long-term accounts receivable andlong-term customer financing approximates its fair value as the effectiveinterest rate for this receivable and customer financing is comparable tomarket rates at December 31, 2007 for similar issuances.

 

### **Credit Risk**

The Company is subject tocredit risk through trade receivables and short-term cash investments. Creditrisk with respect to trade receivables is limited given the creditworthiness ofthe counterparties. The Company invests its excess liquidity in high qualitygovernment securities and short-term commercial paper, bank deposits and moneymarket mutual funds.

 

### **Currency Risk**

The Company’s foreignexchange exposure for accounting purposes mainly relates to theU.S.-denominated monetary assets and liabilities of the Canadian operations ofthe Company. Changes in the exchange rate may result in a decrease or increasein the foreign exchange gain or loss. The Company does not actively hedge thisexposure but reduces the exposure by maintaining the minimum level ofU.S.-denominated cash available to meet its short-term cash requirements.

 

## **NOTE 23.**COMPARATIVE INFORMATION

The Company has reclassifiedcertain prior years’ information to conform with thecurrent year’s presentation.

 

 

 

F-26

----