STELLAR INTERNATIONAL
INC.

FINANCIAL STATEMENTS

(Canadian Funds)

DECEMBER 31, 2004

---



STELLAR INTERNATIONAL INC.

DECEMBER 31, 2004

CONTENTS

|FINANCIAL STATEMENTS | PAGE                                                                                                                                                          
|-------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|                     | AUDITORS' REPORT 
BALANCE SHEET 
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY 
STATEMENT OF OPERATIONS 
STATEMENT OF CASH FLOWS 
NOTES TO FINANCIAL STATEMENTS

---



Page 1



 INDEPENDENT
REGISTERED AUDITORS REPORT 

To The Shareholders OfStellar
International Inc.

We have audited the accompanying
balance sheet of Stellar International Inc. as at December 31, 2004 and the related
statements of operations, deficit and cash flow for the year then ended. These financial
statements are the responsibility of the companys management. Our responsibility is
to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance
with standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform an audit to obtain reasonable assurance whether
the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, these financial
statements referred to above present fairly, in all material respects, the financial
position of Stellar International Inc. as at December 31, 2004 and the results of its
operations and the cash flow for the year then ended in conformity with generally accepted
accounting principles in the United States of America.

We also have reported separately on
the financial statements of Stellar International Inc. for the same period presented in
accordance with accounting principles generally accepted in Canada.

|                 |                            
|---------------- | ---------------------------
|Toronto, Ontario | /S/ MINTZ & PARTNERS, LLP
|March 1, 2005    | CHARTERED ACCOUNTANTS      

---



Page 2

STELLAR INTERNATIONAL INC.

BALANCE SHEET

(Canadian Funds)

AS AT DECEMBER 31, 2004

ASSETS

|                                                                                                                                                                                     | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|CURRENT                                                                                                                                                                              | 
|Cash and cash equivalents (Note 3)                                                                                                                                                   | 
|Accounts receivable                                                                                                                                                                  | 
|Inventory (Note 4)                                                                                                                                                                   | 
|Tax recoverable                                                                                                                                                                      | 
|Prepaid, deposits and sundry receivables (Note 5)                                                                                                                                    | 
|                                                                                                                                                                                    
|                                                                                                                                                                                     | 
|PROPERTY, PLANT AND EQUIPMENT(Note 6)                                                                                                                                                | 
|OTHER ASSETS(Note 7)                                                                                                                                                                 | 
|                                                                                                                                                                                    
|                                                                                                                                                                                     | 
|                                                                                                                                                                                    
|LIABILITIES                                                                                                                                                                          | 
|CURRENT                                                                                                                                                                              | 
|Accounts payable                                                                                                                                                                     | 
|Accrued liabilities                                                                                                                                                                  | 
|Deferred revenues                                                                                                                                                                    | 
|                                                                                                                                                                                    
|                                                                                                                                                                                     | 
|                                                                                                                                                                                    
|CONTINGENCIES AND COMMITMENTS(Note 13)                                                                                                                                               | 
|SHAREHOLDERS' EQUITY                                                                                                                                                                 | 
|CAPITAL STOCK(Note 8)                                                                                                                                                                | 
|AUTHORIZED                                                                                                                                                                           | 
|Unlimited     Non-voting, convertible, redeemable and retractable preferred
                    
        shares with no par value
     Unlimited     Common shares with no par value | 
|ISSUED                                                                                                                                                                               | 
|22,802,373   Common shares (16,350,412 in 2003)                                                                                                                                      | 
|Paid-in capital options and warrants - outstanding                                                                                                                                   | 
|- expired                                                                                                                                                                            | 
|                                                                                                                                                                                    
|                                                                                                                                                                                     | 
|DEFICIT                                                                                                                                                                              | 
|                                                                                                                                                                                    
|                                                                                                                                                                                     | 
|                                                                                                                                                                                    
|                                                                                                                                                                                     | 
|                                                                                                                                                                                    
|See accompanying notes to financial statements.                                                                                                                                      | 

|/s/ Peter Riehl |  | /s/ Arnold Tenney | 
|--------------- |  | ----------------- | 
|Director        |  | Director          | 

---



Page 3

STELLAR INTERNATIONAL INC.

STATEMENT OF CHANGES IN
SHAREHOLDERS EQUITY

(Canadian Funds)

FOR THE YEAR ENDED
DECEMBER 31, 2004

|                                              
|----------------------------------------------
|                                              
|BALANCE,                                      
|December 31, 2002                             
|Shares issued for cash                        
|Shares issued for services                    
|Options issued to consultants                 
|Options exercised                             
|Options issued to employees                   
|Warrants issued to investors                  
|Warrants exercised                            
|Net loss for the year                         
|                                              
|BALANCE,                                      
|December 31, 2003                             
|Shares issued for cash                        
|Shares issued for services                    
|Options issued to consultants                 
|Options exercised                             
|Options issued to employees                   
|Warrants exercised                            
|Net loss for the year                         
|                                              
|BALANCE,                                      
|                                              
|December 31, 2004                             
|                                              
|See accompanying notes to financial statements

---



Page 4

STELLAR INTERNATIONAL
INC.

STATEMENT OF OPERATIONS

(Canadian Funds)

|                                                     | Years Ended December 31,
|---------------------------------------------------- | ------------------------
|
|REVENUE(Note 9)                                      |                         
|                                                    
|Product sales                                        |                         
|Misc. revenue                                        |                         
|                                                    
|Total Revenue                                        |                         
|COST OF GOODS SOLD                                   |                         
|                                                    
|                                                     |                         
|ROYALTIES & LICENSING REVENUE                        |                         
|                                                    
|GROSS PROFIT                                         |                         
|                                                    
|EXPENSES                                             |                         
|Selling, general and administrative                  |                         
|Research and development                             |                         
|Amortization                                         |                         
|                                                     |                         
|                                                    
|LOSS FROM OPERATIONS                                 |                         
|INTEREST AND OTHER INCOME                            |                         
|                                                    
|NET LOSS FOR THE YEAR                                |                         
|                                                    
|LOSS PER SHARE(Note 11)                              |                         
|                                                    
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING |                         
|                                                    
|See accompanying notes to financial statements       |                         

---



Page 5

STELLAR INTERNATIONAL INC.

STATEMENT OF CASH FLOWS

(Canadian Funds)

|                                                       | Years Ended December 31,
|------------------------------------------------------ | ------------------------
|
|CASH FLOWS PROVIDED BY (USED IN)                       |                         
|OPERATING ACTIVITIES                                   |                         
|Net loss for the year                                  |                         
|Amortization                                           |                         
|Issuance of shares and options for services rendered   |                         
|                                                      
|                                                       |                         
|Change in non-cash operating assets and liabilities    |                         
|Increase in accounts receivable                        |                         
|Increase in inventory                                  |                         
|Decrease (increase) in tax recoverable                 |                         
|Increase in prepaid, deposits and sundry receivables   |                         
|Increase in accounts payable and accrued liabilities   |                         
|(Decrease) increase in deferred revenue                |                         
|                                                      
|                                                       |                         
|                                                      
|INVESTING ACTIVITIES                                   |                         
|Additions to disposal of property, plant and equipment |                         
|Increase in other assets                               |                         
|                                                      
|                                                       |                         
|FINANCING ACTIVITIES                                   |                         
|Issuance of common stock                               |                         
|                                                      
|                                                       |                         
|                                                      
|CHANGE IN CASH AND CASH EQUIVALENTS                    |                         
|CASH AND CASH EQUIVALENTS, beginning of year           |                         
|                                                      
|CASH AND CASH EQUIVALENTS, end of year                 |                         
|                                                      
|See accompanying notes to financial statements         |                         

---



Page 6

STELLAR INTERNATIONAL INC.

NOTES TO FINANCIAL
STATEMENTS

(Canadian Funds)

DECEMBER 31, 2004

1.    
DESCRIPTION OF BUSINESS

| | Stellar
International Inc. (Stellar or Company) is a Canadian
pharmaceutical company involved in the development and marketing of high quality,
cost-effective, polysaccharide-based therapeutic products used in a treatment of
osteoarthritis and certain types of cystitis.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stellar
also intends to develop additional healthcare products aimed at niche pharmaceutical
markets.
| | -----------------------------------------------------------------------------------------------------

| | The
Company currently markets its products in Canada; however, its objective is to expand its
sales and marketing efforts to the United States. Accordingly, the Companys USA
licensee is expected to conduct clinical trials necessary to obtain the required
regulatory approvals.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2.    
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

| | These
financial statements have been prepared in accordance with accounting principles generally
accepted in United States of America. On March 1, 2005, separate financial statements for
the same period were prepared in accordance with Canadian generally accepted principles
and were reported on by the independent auditors.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a) | CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and all highly liquid investments purchased with an
original or remaining maturity of three months or less at the date of purchase or are
otherwise highly liquid. Substantially, all cash and cash equivalents are under the
custodianship of two major Canadian financial institutions.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | REVENUE RECOGNITION
Sales are recognized when legal title to the goods has been passed to the customer and
collection is reasonably assured. The Company has a No Return policy on sale
of its goods. Revenue from non-refundable up-front fees for the licensing of technology
and products under agreements which do not require the Company to perform research or
development activities or other significant future performance obligations is recognized
at the time the agreement is executed. Revenue resulting from the achievement of milestone
events stipulated in the agreements is recognized when the milestone is achieved. Up-front
fees and other amounts received in excess of revenue recognized are recorded as deferred
income.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | INVENTORIES
Inventories are valued at the lower of cost and net realizable value with cost being substantially
determined on a first-in, first-out basis.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

---



Page 7

STELLAR INTERNATIONAL
INC.

NOTES TO FINANCIAL
STATEMENTS

(Canadian Funds)

DECEMBER 31, 2004

2.    
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

| | (d) | PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Amortization is being provided for on a
straight-line basis over the estimated useful life of the assets. The Company periodically
compares the carrying value of property, plant and equipment to their net realizable
values and charges income with any impairment to net assets. The estimated useful lives of
the assets are as follows:
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Asset Classification                                         | Useful Life           
| | ------------------------------------------------------------ | ----------------------
| | BuildingComputer and office equipmentManufacturing equipment | 20 years5 years5 years

| | (e) | OTHER ASSETS
Amortization of other assets is being provided for on the straight-line basis as noted below.
| | --- | ----------------------------------------------------------------------------------------------------------

| | Asset Classification | Useful Life
| | -------------------- | -----------
| | Patents              | 17 years   

| |  | Patents represent capitalized legal costs incurred in connection with applications for patents.
For patents and applications that are abandoned, the company charges any remaining
accumulated costs to expenses.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f) | USE OF ESTIMATES
The preparation of financial statements in conformity with United States generally accepted
accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates. These estimates are reviewed periodically, and, as adjustments become
necessary, they are reported in earnings in the period in which they become known.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---



Page 8

STELLAR INTERNATIONAL
INC.

NOTES TO FINANCIAL
STATEMENTS

(Canadian Funds)

DECEMBER 31, 2004

2.    
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

| | (g) | DEFERRED INCOME TAXES
The Company accounts for income taxes using the asset and liability method. Deferred tax
assets and liabilities are recognized based on the difference between the accounting
values of assets and liabilities and the difference between the accounting values of
assets and liabilities and their related tax bases using current income tax rates.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (h) | STOCK-BASED COMPENSATION
Effective January 1, 2003, the Company changed its method of accounting for stock-based compensation
and decided to adopt the fair value based method of accounting for all its stock-based
compensation. The Company adopted these changes using the prospective method in accordance
with Financial Accounting Standards Board (FASB) Statement of Financial
Accounting Standards No. 148. Accordingly, the fair value based method is applied to
awards granted, modified or settled on or after January 1, 2003. Prior to the adoption of
the fair value based method, the Company as permitted by Accounting Principles Board
Opinion No. 25, had chosen to continue its existing policy of recording no compensation
cost on the grant of stock options to employees.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (i) | FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities are translated into Canadian dollars which is the functional
currency of the company at the year-end exchange rate, while foreign currency revenues and
expenses are translated at the exchange rate in effect on the date of the transaction. The
resultant gains or losses are included in income. Non-monetary items are translated at
historical rates.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (j) | RESEARCH AND DEVELOPMENT
Research and development costs are expended as incurred. Approved investment tax credits are netted
against the related expenses.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | (k) | COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 (SFAS 130), Reporting Comprehensive
Income, establishes standards for the reporting and display of comprehensive income
and its components and requires restatement of all previously reported information for
comparative purposes. For the year ended December 31, 2003 and 2004, comprehensive income
was the same as net earnings.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---



Page 9

STELLAR INTERNATIONAL
INC.

NOTES TO FINANCIAL
STATEMENTS

(Canadian Funds)

DECEMBER 31, 2004

2.    
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

| | (l) | LOSS PER SHARE
Basic earnings (loss) per share are computed by dividing the net earnings (loss) by the weighted
average number of common shares outstanding during the year, adjusted for any subdivision
or consolidation.
Diluted earnings per Common Share would be computed using the weighted average number of common
and dilutive common equivalent shares outstanding during the year. Dilutive common
equivalent shares consist of shares issuable upon exercise of stock options and warrants
and conversion of preferred stock. For the years ended December 31, 2004 and 2003,
therefore, the diluted loss per share is not calculated as the effect would be
antidilutive.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (m) | NON-MONETARY TRANSACTIONS
Shares issued for commercial transactions are valued based on the value of services provided.
| | --- | -----------------------------------------------------------------------------------------------------------------------

3.    
CASH AND CASH EQUIVALENTS       Consists of -

|                       | December 31,
|---------------------- | ------------
|                       | 2004        
|Cash                   |             
|Short-term investments |             
|                       |             

4.     INVENTORIES

|                    | December 31,
|------------------- | ------------
|                    | 2004        
|Raw material        |             
|Finished goods      |             
|Packaging materials |             
|Work in process     |             
|                    |             

---



Page 10

STELLAR INTERNATIONAL
INC.

NOTES TO FINANCIAL
STATEMENTS

(Canadian Funds)

DECEMBER 31, 2004

5.    
PREPAID, DEPOSITS AND SUNDRY RECEIVABLES

|                                     | December 31,
|------------------------------------ | ------------
|                                     | 2004        
|Prepaid operating expenses           |             
|Deposit on manufactured goods        |             
|Materials for use in clinical trials |             
|Directors fees                       |             
|                                     |             

6.    
PROPERTY, PLANT AND EQUIPMENT

|                        | Cost | December 31, 2004 Accumulated Amortization | Net Carrying Amount | December 31, 2003 Net Carrying Amount
|----------------------- | ---- | ------------------------------------------ | ------------------- | -------------------------------------
|Land                    |      | $     90,000                               |                     | $         --                         
|Building                |      | 520,989                                    |                     | 4,286                                
|Office Equipment        |      | 39,394                                     |                     | 22,554                               
|Manufacturing Equipment |      | 480,476                                    |                     | 166,787                              
|Computer Equipment      |      | 34,252                                     |                     | 19,624                               
|                        |      | $1,165,111                                 |                     | $213,251                             

7.    
OTHER ASSETS

|         | Cost | December 31, 2004 Accumulated Amortization | Net Carrying Amount | December 31, 2003 Net Carrying Amount
|-------- | ---- | ------------------------------------------ | ------------------- | -------------------------------------
|Patents  |      | $18,091                                    |                     | $  1,661                             
|Goodwill |      | 1                                          |                     | --                                   
|         |      | $18,092                                    |                     | $  1,661                             

8.    
CAPITAL STOCK

| | (a) | Common Shares
During the year, the Company issued 6,451,961 Common Shares, of which 4,088,794 were issued in a
private placement for cash at US$0.74 per share. The remaining 2,363,167 Common Shares
included 1,415,000 Common Shares that were issued to consultants, employees and directors,
who exercised stock options, with an average price per share of $0.48 for cash, and
550,667 Common Shares issued for warrants exercised at $0.35 per share. The remaining
397,500 Common Shares were issued to consultants with an average price per share of $0.46
for services.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---



Page 11

STELLAR INTERNATIONAL
INC.

NOTES TO FINANCIAL
STATEMENTS

(Canadian Funds)

DECEMBER 31, 2004

8.    
CAPITAL STOCK (continued)

|                               | Number of Shares | $ Amount  
|------------------------------ | ---------------- | ----------
|Balance, December 31, 2002     |                  | 14,261,577
|Issued for cash consideration  |                  | 1,431,335 
|Issued for consulting services |                  | 657,500   
|Balance, December 31, 2003     |                  | 16,350,412
|Issued for cash consideration  |                  | 6,054,461 
|Issued for consulting services |                  | 397,500   
|Balance, December 31, 2004     |                  | 22,802,373

| | (b) | Shares to be Issued
There were no shares for consulting services outstanding for issuance at December 31, 2004 (2003
 $27,078).
| | --- | --------------------------------------------------------------------------------------------------------------------------------

| | (c) | Paid-in Capital Options and Warrants
The changes to the paid-in capital options and warrants are as follows:
| | --- | ------------------------------------------------------------------------------------------------------------

|Balance, December 31, 2002                           |  | $   41,300 |  
|---------------------------------------------------- |  | ---------- | -
|Options issued to consultants                        |  | 95,470     |  
|Options issued to employees                          |  | 54,426     |  
|Warrants issued in connection with private placement |  | 33,033     |  
|Options exercised                                    |  | (4,784     | )
|Warrants exercised                                   |  | (5,500     | )
|Balance, December 31, 2003                           |  | 213,945    |  
|Options issued to consultants                        |  | 25,688     |  
|Options issued to employees                          |  | 154,000    |  
|Options exercised                                    |  | (17,388    | )
|Warrants exercised                                   |  | (27,533    | )
|Balance, December 31, 2004                           |  | $ 348,712  |  

| | (d) | Warrants
| | --- | --------

|                                                                                                                                                                                                                              | Number of Shares                                                                   | Exercise Price                                                                  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | --------------------------------------------------------------------------------
|Balance, December 31, 2002            
Issued to private placement investors 
Exercised                             
Balance, December 31, 2003            
Exercised                             
Balance, December 31, 2004 | -     
       660,667 
     (110,000)
      550,667  
 (550,667)    
            0 | -   
 0.35 to 0.45  
          0.35 
  0.35 to 0.45 
         0.35  
          0

---



Page 12

STELLAR INTERNATIONAL
INC.

NOTES TO FINANCIAL
STATEMENTS

(Canadian Funds)

DECEMBER 31, 2004

8.    
CAPITAL STOCK (continued)

| |  | The warrants were exercisable at $0.35 per share in the first year and $0.45 per share in the
second year. All outstanding warrants were exercised in 2004.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) | Stock Options
Under the terms of the Companys stock option plan (Plan), the Company is
authorized to grant directors, officers, employees and others options to purchase Common
Shares at prices based on the market price of shares as determined on the date of grant.
On December 31, 2004, the maximum number of Common Shares that may be issued under the
Plan was 4,157,841. Stock options become exercisable at dates determined by the Board or
the Compensation Committee of the Board, with the term of an option not to exceed three
and one-half years from the date of the grant of the option.

During the year, the Company issued 465,000 options. The Company issued 315,000 of these options
to employees, officers and directors, which entitles the holder to purchase one Common
Share of the Company for a price ranging from $2.00 to $2.05 per share at any time and
from time to time until April 2, 2007 (2003  480,000). Compensation expense,
amounting to $154,000, has been recognized based on the fair value of the options issued.
The Company also issued 150,000 options to a consultant, which will vest on a quarterly
basis over a 2 year term, of which 18,750 have vested in 2004. Each option entitles the
holder to purchase one Common Share of the Company for price of $1.85 US per share at any
time and from time to time up to September 1, 2006. Consulting expense amounting to
$25,688 has been recognized based on the fair value of the options issued in the year the
services were rendered. The total number of options outstanding as at December 31, 2004
was 1,590,000.

On April 29, 2004, the Company increased the number of options in the plan to 4,157,841 from
2,852,000.

In 2003, the Company issued 480,000 options to employees, officers and directors. Each option
entitles the holder to purchase one Common Share of the Company for a price ranging from
$0.27 to $0.75 per share at any time and from time to time until December 17, 2006.
Compensation expense amounting to $54,426 has been recognized based on the fair value of
the options issued. The Company also issued 605,000 options to four consultants. Each
option entitles the holder to purchase one Common Share of the Company for price ranging
from $0.40 to $0.75 per share at any time and from time to time up to November 19, 2006.
Consulting expense amounting to $49,270 was recognized based on the fair value of the
options issued in the year the services were rendered.

The following table presents information relating to stock options outstanding and exercisable
at December 31, 2004.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---



Page 13

STELLAR INTERNATIONAL
INC.

NOTES TO FINANCIAL
STATEMENTS

(Canadian Funds)

DECEMBER 31, 2004

8.    
CAPITAL STOCK (continued)

|Range of Exercise Price | Number
         Outstanding | Weighted
     Average
    Remaining
 Contractual Life | Weighted
    Average
 Exercise Price | Number
  Exercisable at
 December 31, 2004 | Weighted Average
 Exercise Price
|----------------------- | --------------------------- | ----------------------------------------------------- | ------------------------------------ | ------------------------------------------ | --------------------------------
|$0.23 to $0.52          | 660,000                     | 1.02 years                                            | .36                                  | 660,000                                    | .36                             
|$0.52 to $.075          | 465,000                     | .93 years                                             | .71                                  | 465,000                                    | .71                             
|$2.00 to $2.40          | 465,000                     | 2.22 years                                            | 2.15                                 | 333,750                                    | 2.05                            
|                        | 1,590,000                   | 1.35years                                             | 0.98                                 | 1,458,750                                  | 0.85                            

| |  | The changes in options outstanding are as noted below:
| |  | ------------------------------------------------------

|                           | Options | Weighted
      Average
      Exercise
Price
|-------------------------- | ------- | -------------------------------------------
|Balance, December 31, 2002 |         | 1,600,000                                  
|Granted                    |         | 1,085,000                                  
|Exercised                  |         | (110,000                                   
|Expired                    |         | (35,000                                    
|Balance, December 31, 2003 |         | 2,540,000                                  
|Granted                    |         | 465,000                                    
|Exercised                  |         | (1,415,000                                 
|Balance, December 31, 2004 |         | 1,590,000                                  

| |  | Prior to 2003, the Company was accounting for the recognition of compensation for its employee
stock option plan using the intrinsic value, which is the difference between the market
value of the underlying common stock and the exercise price of the option at the grant
date.

The compensation cost charged against income for this plan was $179,688 for the year ended
December 31, 2004. The counterpart has been recorded as additional paid-in capital.

The fair value of these options ranged from $0.28 to $1.37 estimated at the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---



Page 14

STELLAR INTERNATIONAL
INC.

NOTES TO FINANCIAL
STATEMENTS

(Canadian Funds)

DECEMBER 31, 2004

8.    
CAPITAL STOCK (continued)

|                        |       
|----------------------- | ------
|Risk-free interest rate | 2.75% 
|Expected life           | 3years
|Expected volatility     | 36%   
|Dividend yield          | 0%    

| |  | When employees or non-employees exercise their stock options, the capital stock is credited by
the sum of the consideration paid together with the related portion previously credited to
additional paid-in capital when compensation costs were charged against income. The
prospective method omits the effects of awards granted, modified or settled before January
1, 2003.

Pro-forma information regarding net loss and loss per share for fiscal year 2002 had been determined
as if the Company had accounted for its employee stock options under the fair value
method. Effective January 1, 2003, compensation expense was recorded based on the fair
value of the options issued to employees. The weighted average fair value of options
granted during the year ended December 31, 2004 was estimated to be $0.33 (2003 
$0.11).
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9. REVENUES

| |  | Revenue
for the year includes products sold in Canada, international sales of products, raw
materials sold at cost to our European licensee, interest earned and revenue received with
regards to a sign rental contract, for a sign located on the property. Revenue earned is
as follows:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                              | December 31,
|----------------------------- | ------------
|
|Products Sales                |             
|Domestic sales                |             
|International sales           |             
|Raw materials                 |             
|                              |             
|Miscellaneous revenue         |             
|Sign rental income            |             
|Interest earned               |             
|                              |             
|Total Revenue                 |             
|Royalties & licensing revenue |             
|Licensing fees                |             
|Royalty payments              |             
|                              |             
|Total Revenue                 |             

---



Page 15

STELLAR INTERNATIONAL
INC.

NOTES TO FINANCIAL
STATEMENTS

(Canadian Funds)

DECEMBER 31, 2004

9.    
REVENUES (continued)

| |  | The
Company currently sells its own products in Canada, and is in-licensing other products. In
addition, the Company out-licenses its products in Europe, the Middle East, South America
and the United States. The continuing operations reflected in the statements of operations
include Stellars activity in these markets.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10.    
INCOME TAXES

| |  | Rate
reconciliation

A reconciliation of income tax expense (benefit) computed at the statutory income tax rate
included in the statement of income follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|Deferred income tax assets are comprised of:  |  |  |   | 2004     |   |   | 2003     |  
|--------------------------------------------- |  |  | - | -------- | - | - | -------- | -
|Tax recovery at statutory rate                |  |  | $ | (486,000 | ) | $ | (335,000 | )
|Deferred tax asset valuation allowance change |  |  |   | 486,000  |   |   | 335,000  | )
|                                             
|                                              |  |  | $ | --       |   | $ | --       |  
|                                             

| |  | Deferred tax assets reflect the net effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes. Significant component of net
deferred tax assets is as listed below:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Deferred income tax assets are comprised of: |  |  |   | 2004     |   |   | 2003     |  
|-------------------------------------------- |  |  | - | -------- | - | - | -------- | -
|Net deferred tax asset                       |  |  | $ | 948,000  |   | $ | 672,800  |  
|Valuation allowance                          |  |  | $ | (948,000 | ) | $ | (672,800 | )
|                                            
|                                             |  |  | $ | --       |   | $ | --       |  
|                                            

| |  | The
valuation allowance was provided against the net deferred tax assets at December 31, 2004
due to uncertainties as to their ultimate realization. The tax losses expire as follows:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|     | 
|---- | 
|2007 | 
|2008 | 
|2009 | 
|2010 | 
|2014 | 
|    
|     | 
|    

---



Page 16

STELLAR INTERNATIONAL
INC.

NOTES TO FINANCIAL
STATEMENTS

(Canadian Funds)

DECEMBER 31, 2004

11.    
LOSS PER SHARE

| |  | The
treasury stock method assumes that proceeds received upon the exercise of all warrants and
options outstanding in the year are used to repurchase the Companys shares at the
average share price during the period.

The following table sets forth the computation of loss per share:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                     | 2004 | 2003
|-------------------------------------------------------------------- | ---- | ----
|Numerator for loss per share available to common shareholders        |      |     
|Denominator for loss per share - weighted average shares outstanding |      |     
|Loss per share                                                       |      |     

12.    
INVESTMENT TAX CREDITS RECEIVABLE AND MEASUREMENT UNCERTAINTY

| |  | Investment
tax credits are earned in connection with research and development activities. The
receivable balance of the recognized portion is $38,131 (2003  $117,708).

The
Federal portion of the research and development claim for 2002 has been accepted as filed
and the amount approved by the tax authorities has been recorded as a credit to related
expenses. The provincial portion of this claim is still awaiting approval. Once the amount
has been approved, it will be recorded as a reduction of research and development
expenses.

The
unrecorded research and development claims for 2003 and 2004 will be filed in due course.
The extent of the overall claim is dependent upon the qualification of each individual
project under strict technical criteria, and amounts may vary upon review of Canada
Revenue Agency which will be filed on or before June 30, 2005. Adjustments to the claim,
if any, will be accounted for in the year of assessment.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13.    
CONTINGENCIES AND COMMITMENTS

| | (a) | Legal Action
On May 2, 1997, a competitor claimed injunctive relief against the Company as well as damages
including aggravated, exemplary and punitive damages of $20,000,000 for breach of
fiduciary duty, breach of contract, misuse of confidential information, including breach
of contract, interference with contractual interests, conversion, detinue and an
accounting for the profits from such activities. In turn, the Company counterclaimed for a
dismissal of the action and damages in the amount of $500,000, interest and costs.

During the year, the lawsuit and counterclaim were dismissed on consent without costs by the
Ontario Superior Court of Justice.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---



Page 17

STELLAR INTERNATIONAL
INC.

NOTES TO FINANCIAL
STATEMENTS

(Canadian Funds)

DECEMBER 31, 2004

13.    
CONTINGENCIES AND COMMITMENTS (continued)

| | (b) | Royalty Agreement
In September 2000, the Company entered into a royalty agreement for sales of Uracyst®
product.  The agreement involves royalty payments, which initially were based on 5%
of the total sales of Uracyst at a declining rate of 1% per year over a three-year period,
declining to 2% rate effective October 1, 2003 and this royalty will remain at 2% until
the end of the agreement on September 30, 2008.

In February 2002, the Company entered into a royalty agreement for products which were
introduced to Stellar by a consultant. The agreement involves royalty payments, which will
be paid based on gross dollar sales. The schedule for royalty payments is presently
calculated on Skelite sales as:

     First $1,000,000 in sales - 3%    
     Second $1,000,000 in sales - 2%   
     All sales over $2, 000,000  1% out to the 5th year.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) | License Agreement
During the year, the Company entered into the following new licensing agreements. On June 30,
2004, Stellar signed a NeoVisc® licensing agreement with Triptibumis Sdn. Bhd.
(Triptibumis) for Malaysia, Singapore and Brunei. The Company will supply
Triptibumis with NeoVisc in Canadian packaging at a set price for this market. Triptibumis
is responsible for all costs related to registering the products in the territory and all
sales and marketing costs. The term of this agreement will continue for a period of three
years and will be renewable for an additional three years, unless earlier terminated by
either party in accordance with the agreement.

On August 17, 2004, the Company entered into a licensing agreement with Pharmore GmbH to sell
NeoVisc in the German market. The Company will supply NeoVisc in a German package format
at a set price. This agreement will require Pharmore to pay a 5% royalty on their net
sales (gross sales less allowances and returns) in the German market. Pharmore will be
responsible for all costs incurred in obtaining both German regulatory approval and
registering the CE mark for NeoVisc, plus all sales, marketing and distribution costs. The
term of this agreement will continue for a period of three years and will be renewable for
an additional three years, unless earlier terminated by either party in accordance with
the agreement.

The Company entered into two license agreements to grant the exclusive rights and license to
use the methods and technical know-how for the purposes of developing, marketing and
selling NeoVisc and Uracyst products in the United States. As provided in the agreements,
the Company received non-recurring, non-refundable license fees which have been recognized
as income during the year.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---



Page 18

STELLAR INTERNATIONAL
INC.

NOTES TO FINANCIAL
STATEMENTS

(Canadian Funds)

DECEMBER 31, 2004

13.    
CONTINGENCIES AND COMMITMENTS (continued)

| |  | These
agreements commenced on March 24, 2004 and will continue for a period of twenty years and
will be renewable for an additional twenty years, unless earlier terminated by the parties
in accordance with these agreements. These agreements require the payment of milestone and
royalties to Stellar during the term of the agreement.


During 2003, the Company entered into two licence agreements to grant the exclusive rights and
license to use the methods and technical know-how for the purposes of manufacturing,
marketing and selling NeoVisc and Uracyst products in the specified territory. As provided
in one of the agreements, the Company received a non-recurring, non-refundable license fee
which was recognized as income during the fiscal year 2003, and the remaining licence fees
will be recognized in income upon achievement of the specified milestones. The agreements
will expire seven to ten years after December 31, 2003, unless earlier terminated by the
parties in accordance with the agreement.

On December 28, 2001, the Company entered into a license agreement with G. Pohl-Boskamp GmbH
& Co. (Pohl-Boskamp), to grant the exclusive rights and license to use the
methods and technical know-how for the purposes of manufacturing, marketing and selling
Uracyst-S products in specified territories in Europe. In consideration, the Company is to
receive a combination of non-recurring, non-refundable license fees and royalty payments.
The license fees are due upon the achievement of specified milestones.

One of the license fees was due upon signing of the agreement and was recognized as income
during the fiscal year 2001, and the remaining license fees will be recognized in income
upon achievement of the specified milestones.

The royalties, which equal to 17.5% of net sales of each quarter, are to be paid in arrears on
or before the 45th day of each quarter with respect to net sales in the preceding quarter.
Until such time as there are net sales aggregating three million dollars, only 7.5% of the
17.5% royalty will be paid to the Company with the balance of 10% of the royalty being
credited against the license fee.

The agreement will expire seven years after December 21, 2001 or unless earlier terminated by
the parties in accordance with the agreement.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (d) | Distribution Agreement
In October 2003, the Company entered into an exclusive distribution agreement with a company
in the United States, to distribute bladder cancer test kit products within the field and
territory as defined in the agreement, for a five year period commencing January 1, 2004,
in consideration for a technology access fee of US$10,000 and an initial order. Either
party may terminate the agreement 30 days after delivery of written notice for failure to
convert a material default under the agreement. The Company may terminate the agreement
immediately, in the event that any conditions specified in the agreement occurs.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---



Page 19

STELLAR INTERNATIONAL
INC.

NOTES TO FINANCIAL
STATEMENTS

(Canadian Funds)

DECEMBER 31, 2004

13.    
CONTINGENCIES AND COMMITMENTS (continued)

| |  | The
Company is subject to an annual minimum product purchases and annual marketing plan which
will be approved by the American company. The Company agreed to spend a minimum amount of
$10,000, in marketing the products in each of the first two calendar years covered by the
agreement.

The technology access fee was waived and the initial order amounting to US$38,202 was
delivered to London, Ontario, Canada.  The Company paid a deposit the Company in December 2003.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (e) | Manufacturing Agreement
On April 20, 2004, the Company signed a manufacturing agreement with Dalton Chemical
Laboratories, Inc. in Toronto, Ontario, Canada, to manufacture Stellars NeoVisc®
product. The agreement is for five years and may be renewed only by a written agreement
between the parties. This agreement, along with the agreement to manufacture Uracyst®
previously made with Dalton, will allow the Company to expand its products into
international markets.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (f) | New Facilities
In June 2004, the Company entered into an agreement of purchase and sale, to purchase a
two-storey building in London, Ontario, Canada. The total purchase price was $450,000, of
which $90,000 was estimated to be the value of the land. The building has sufficient space
to accommodate the packaging process, as well as provide warehousing and greater office
space. The Company moved to the new location on October 22, 2004. The Company had
renovation costs of $153,495 as of December 31, 2004 which have been allocated as building
costs. Of these costs $13,318 has been used in preparation of the new packaging area.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (g) | Leases
The Company presently leases office equipment under operating leases. At December 31, 2004,
the future minimum lease payments under operating leases are $5,600.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

14.    
SIGNIFICANT CUSTOMERS

| |  | During
the year, the Company had one customer that represented 38.3% of sales (2003 
38.5%).
| |  | ---------------------------------------------------------------------------------------------

15.    
RELATED PARTY TRANSACTIONS

| |  | The
Company entered a business consulting agreement in December 2001 with Mr. Doug Frooman
individual who subsequently became a . In director in which consideration in the form of
an option to purchase 60,000 Common Shares on February 5, 2002, for the services, which
were provided in initiating and signing of the European License., Mr. Froom was granted an
option to purchase 60,000 Common
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---



Page 20

STELLAR INTERNATIONAL
INC.

NOTES TO FINANCIAL
STATEMENTS

(Canadian Funds)

DECEMBER 31, 2004

15.    
RELATED PARTY TRANSACTIONS (continued)

| |  | Shares
on February 5, 2002. Such option provides for an exercise price of $0.23 (Cdn.) per share
and an expiry date of February 5, 2005. All of these options were exercised in 2004.

The Company entered a fiscal advisory and consulting agreement on December 17, 2003, with LMT
Financial Inc. (LMT) (a company owned by Mr. Arnold Tenneya director) for
services to be provided in 2004. In consideration for the services, the AdvisorLMT was to
be paid an annual fee of $120,000, which was satisfied in by full by the issuance by the
Corporation of 200,000 Common Shares. A total of 50,000 Common Shares was issued once per
calendar quarter. In addition, the AdvisorLMT received an option to acquire up to 200,000
common shares of the Corporation, at an exercise price of $0.75 per share. These options
were granted in 2003 and recorded at that time.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16.    
          FINANCIAL RISKS

| | (a) | Credit Risk
The Company is engaged in the sale of pharmaceutical products, typically to a small number of
major customers, although the composition of this group of customers has changed from year
to year. The Company performs ongoing credit evaluation of its customers financial
condition and, generally, requires no collateral.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | Concentration Risk
A majority of the Companys cash and cash equivalents are with two major Canadian
banking institutions. Deposits held with this bank may exceed the amount of insurance
provided on such deposits. Generally, these deposits may be redeemed upon demand and,
therefore, bear minimum risk.

There were two customers holding 44.6% of the outstanding accounts receivable as at December 31,
2004 in comparison to 44.3% belonging to one customer in 2003.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17.    
RECENT ACCOUNTING PRONOUNCEMENTS

| |  | Recent
accounting pronouncements followed by the Company under U.S. GAAP are summarized below.
| |  | ----------------------------------------------------------------------------------------------

| |  | (i) | SFAS No. 123(R). SFAS No. 123(R), Share-Based Payment, issued in December 2004,
               is a revision of FASB Statement 123, Accounting for Stock-Based Compensation and
               supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its
               related implementation guidance. The Statement focuses primarily on accounting
               for transactions which an entity obtains employee services in share-based
               payment transactions. SFAS No. 123 (Revised 2004) requires a public entity to
               measure the cost of employee services received in exchange for an award of
               equity instruments based on the grant-date fair value of the award. That cost
               will be recognized over the period during which an employee is required to
               provide service in exchange for the award. Effective January 1, 2003, the
               Company adopted the statement to account for its
| |  | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---



Page 21

STELLAR INTERNATIONAL
INC.

NOTES TO FINANCIAL
STATEMENTS

(Canadian Funds)

DECEMBER 31, 2004

17.    
RECENT ACCOUNTING PRONOUNCEMENTS (continued)

| |  |  | employee stock options under the fair market value method.  See Note 8 - Capital Stock.
| |  |  | ---------------------------------------------------------------------------------------

|(iii) |  | SFAS No. 151. SFAS No. 151, Inventory Costs, an amendment to
               Accounting Research Bulletin No. 43, Inventory Pricing, to clarify the
               accounting for abnormal amounts of idle facility expense, freight, handling
               costs and wasted material. This Statement requires that those items be
               recognized as current-period charges regardless of whether they meet the
               criterion of so normal. Additionally, this Statement requires that
               allocation of fixed production overheads to the costs of conversion be based on
               the normal capacity of the production facilities. The provisions of SFAS No. 151
               will become effective for fiscal years beginning after June 15, 2005. The
               Company has not determined the impact of adopting this standard.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(iv) |  | SFAS No. 153. SFAS No. 153, Exchanges of Nonmonetary Assets, an
               amendment to Accounting Principles Board Opinion No. 29. Accounting for
               Nonmonetary Transactions, is based on the principle that exchanges of
               nonmonetary assets should be measured based on the fair value of the assets
               exchanged. The guidance in that Opinion, however, included certain exceptions to
               that principle. This Statement amends Opinion 29 to eliminate the exception for
               nonmonetary exchanges of similar productive assets and replaces it with a
               general exception for exchanges in which the future cash flows of the entity are
               not expected to change significantly as a result of the exchange. The provisions
               of SFAS No. 153 will become effective for nonmonetary asset exchanges in fiscal
               periods beginning after June 15, 2005. The Company has not determined the impact
               of adopting this standard.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18.    
SUBSEQUENT EVENTS

| |  | Effective
January 1, 2005 the Company changed its name from Stellar International Inc. to Stellar
Pharmaceuticals Inc. This name change is being made so that the Companys name better
reflects it underlying business.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19.    
COMPARATIVE FIGURES

| |  | Certain comparative figures have been reclassified to conform to the current years
presentation.
| |  | -------------------------------------------------------------------------------------------------

20.    
DECEMBER 31, 2003 FINANCIAL STATEMENTS

| |  | The December 31, 2003 financial statements were audited by another auditing firm.
| |  | ---------------------------------------------------------------------------------