UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB

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|-------------------------------------------------------------- | ----------------------------------------------------------------------------------
|x                                                              | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|                                                               |                                                                                   
|For the fiscal year ended: December 31, 2007                  
|                                                               |                                                                                   
|                                                               | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                               |                                                                                   
|For the transition period from: _____________ to _____________



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Stellar Pharmaceuticals Inc.

(Name of small business issuer in its charter)



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|---------------------------- | ------------ | -------------------
|Ontario, Canada              | 0-31198      | Not Applicable     
|(State or Other Jurisdiction | (Commission  | (I.R.S. Employer   
|of Incorporation)            | File Number) | Identification No.)

544 Egerton Street, London, Ontario, Canada, N5W 3Z8

(Address of Principal Executive Office) (Zip Code)

(519) 434-1540

(Registrants telephone number, including area code)

N/A

(Former name or former address, if changed since last report)

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|Securities registered pursuant to Section 12(b) of the Act:
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|Title of each class                                         |                  | Name of each exchange on which registered
|Not Applicable                                              |                  | Not Applicable                           
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|Securities registered pursuant to Section 12(g) of the Act:
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|Common Shares                                              
|                                                            | (Title of Class) |                                          

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|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | --- | - | -- | 
|Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and
|(2) has been subject to such filing requirements for the past 90 days.                                                                                                                                                                                  | x | Yes |   | No
|                                                                                                                                                                                                                                                       
|Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements       
|incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.                                                                                                                                                         | x |    
|                                                                                                                                                                                                                                                       
|Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).                                                                                                                                                 |   | Yes | x | No
|                                                                                                                                                                                                                                                        |  
|State issuers revenue for its most recent fiscal year. $2,247,265 (Cdn.)                                                                                                                                                                              



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|                                                                                                                                                                                                                                                                                                           
|As of March 30, 2008, the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the average bid and asked price of such common equity, as of such date, was $4,599,564(Cdn.).

As of March 30, 2008, 23,822,540 Common Shares were outstanding.
|                                                                                                                                                                                                                                                                                                           
|Transitional Small Business Disclosure Format (Check one):                                                                                                                                                                                                                                                  |  | Yes | x | No









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General

In this annual report, Stellar and the Company refer to Stellar Pharmaceuticals Inc. an Ontario, Canada corporation. All dollar amounts in this annual report are stated in Canadian Dollars unless stated otherwise. Certain terms used in this annual report are defined below in the section entitled Glossary. The names of products referred to in this annual report are the trademarks or registered trademarks of their respective owners. All rights reserved.

Forward-Looking Statements

Readers are cautioned that actual results may differ materially from the results projected in any "forward-looking" statements included in this annual report, which involve a number of risks or uncertainties. Forward-looking statements are statements that are not historical facts, and include statements regarding the Companys planned research and development programs, anticipated future losses, revenues and market shares, planned clinical trials, expected future expenditures, the Companys intention to raise new financing, sufficiency of working capital for continued operations, and other statements regarding anticipated future events and the Companys anticipated future performance. Forward-looking statements generally can be identified by the words "expected", "intends", "anticipates", "feels", "continues", "planned", "plans", "potential", "with a view to", and similar expressions or variations thereon, or that events or conditions "will", "may", "could" or "should" occur, or comparable terminology referring to future events or results.

The Companys actual results could differ materially from those anticipated in these forward-looking statements as a result of numerous factors, including those listed under "Risks and Uncertainties" in Item 6 of this annual report, any of which could cause actual results to vary materially from current results or the Company's anticipated future results. The Company assumes no responsibility to update the information contained herein.

Exchange Rate for Canadian Dollar

The accounts for Stellar are maintained in Canadian dollars which is the Companys functional currency. All dollar amounts contained herein are expressed in Canadian dollars, except as otherwise indicated. As at March 25, 2008, the exchange rate for Canadian dollars/United States dollars was $1.00 (Cdn.) = $0.9826 (U.S.).

Set forth below are the exchange rates for the Canadian dollar equivalent expressed in United States currency during 2007, 2006 and 2005.

|               |  |                          |  |        |  |       
|-------------- |  | ------------------------ |  | ------ |  | ------
|               |  | Years ended December 31,
|               |  | 2007                     |  | 2006   |  | 2005  
|At End of Year |  | 1.0203                   |  | 0.8581 |  | 0.8585
|Average        |  | 1.0747                   |  | 0.8816 |  | 0.8224
|High           |  | 1.1030                   |  | 0.9013 |  | 0.8672
|Low            |  | 0.8419                   |  | 0.8640 |  | 0.7853



Enforceability of Certain United States Judgments

The Company is incorporated in the Province of Ontario, Canada and a substantial part of its assets are located outside of the United States. All but one (1) of the Companys directors and officers are neither citizens nor residents of the United States, and all or a substantial part of the assets of such persons may be located outside the United States. As a result, it may be difficult to affect service of process within the United States upon the Company and such persons or to realize against the Company or such persons within the United States upon judgments of courts of the United States predicated upon civil liabilities under the United States federal securities laws. Fogler, Rubinoff LLP, Canadian counsel for the Company, has advised that there is doubt as to whether courts in the Province of Ontario would (i) enforce judgments of United States courts obtained in actions against the Company or such persons predicated upon the civil liability provisions of the United States federal securities laws or (ii) enforce, in original actions, liabilities against the Company or such persons predicated solely upon such statutory provisions.



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PART I

Item 1.

Description of Business.

Overview

Stellar is a Canadian pharmaceutical company involved in the development and marketing of high quality, cost-effective, polysaccharide-based therapeutic products used in the treatment of osteoarthritis and certain types of cystitis. Stellar also intends to develop additional healthcare products aimed at niche pharmaceutical markets. Stellars product development strategy focuses on seeking novel applications in markets where its products demonstrate true cost effective therapeutic advantages. Stellar also intends to build revenues through out-licensing its products and in-licensing other products for Canada and international markets that are focused on similar niche markets.

Stellar has developed and currently markets the following three medical products: (i) NeoVisc®, (ii) Uracyst® and (iii) the Uracyst® Test Kit. NeoVisc, a 3 injection, high molecular weight, sodium hyaluronate therapy, was developed to provide a cost-effective alternative treatment to the over 3 million Canadians suffering from osteoarthritis. Uracyst, a chondroitin sulfate-based therapy, and the Uracyst Test Kit were developed to identify defective bladder linings and provide symptomatic relief to patients in Canada with glycosaminoglycan (GAG) deficient cystitis such as interstitial cystitis. Each of these products has received regulatory approval in Canada. Uracyst and the Uracyst Test Kit are patented in the United States and in Canada with international patents pending.

Stellar markets its products in Canada through its own sales force and currently has licensing agreements for the distribution of its products in 58 countries. The Companys focus on product development continues to be two fold, utilizing in-licensing and out-licensing for immediate impact on its revenue stream. These activities enable Stellar to fund its own in-house product development for future growth and stability. Stellar, through its out-licensing partners, intends to conduct clinical trials where necessary, to obtain the required regulatory approvals for its products in international markets.

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 received a combination of non-recurring, non-refundable license fees and royalty payments. In April 2007, the Company terminated its license agreement with G. Pohl-Boskamp GmbH & Co. ("Pohl-Boskamp"), which provided for the sale of Uracyst products in Europe. Pohl-Boskamp disputed the basis on which the Company terminated the agreement and the consequences that result from such termination. The parties attended mediation in September 2007 in which an agreement was reached and a settlement made. Under the terms of the settlement the parties agreed that the license agreement will remain in full force and effect until March 31, 2008. Further, Pohl-Boskamp agreed to pay Stellar the sum of €200,000 (Cdn$283,920), payable in two equal installments of €100,000 due on September 20, 2007 and December 31, 2007. The Company has recorded the $283,920 in the following manner: 1) $210,220 as an offset for expenses incurred in regards to the termination and mediation processes which has been recorded as a reduction to selling, general and administration expense; 2) the remaining $73,700 has been recorded as Interest and other income.

In June 2003, Stellar entered into distribution agreements with BurnsAdler Pharmaceuticals to sell Stellars products in Latin America and the Caribbean. Sales have been ongoing in the Dominion Republic and Bahamas, two of the smaller territories included in the territory, but progress has been slow in the major Latin American markets due to competitive pricing issues.

In October 2003, the Company entered into an exclusive distribution agreement with Matritech, Inc., to sell BladderChek in the Canadian market. In October 2004, Stellar commenced selling BladderChek in Canada.

In June 2004, Stellar entered into a NeoVisc licensing agreement with Triptibumis Sdn. Bhd. (Triptibumis) for Malaysia, Singapore and Brunei. Triptibumis has obtained reasonable success in this small, competitive market. New areas of the territory however, have been slow in receiving regulatory approval. Although it can not be certain, it is expected that some of these territories should receive approval in the first half of 2008. The term of this agreement has been extended until June 30, 2010.

In July 2005, the Company entered into a license agreement with Innogen Ilac for the sale of NeoVisc in Turkey. In August 2005, the Company entered into a distribution agreement with Technimed for the sale of NeoVisc in Lebanon and Jordan. Although this is a small market, Technimed sales have increased by 120.6% in 2007 over sales in 2006.



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In September 2005, the Company entered into a licensing agreement with Shanghai Ya Jun Medical for the sale of Uracyst in China. All product specifications have been approved by the Chinese regulatory body ("SFDA") and the final document submission was delivered to the SFDA in June 2007. Although the Company anticipated this registration would have occurred in 2007, to-date such approval has not been granted. The Company is hopeful that final approval by SFDA will received in the first half of 2008. Stellar also entered into a licensing agreement with Al-Mohab Co. for the sale of NeoVisc in Kuwait in November 2005 with a small order occurring in the early part of 2007.

In December 2005, the Company entered into a licensing agreement with Megapharm for the sale of Uracyst in Israel. While Uracyst has received regulatory approval from the ministry of health; it still lacks approval on the reimbursement formulary. Sales for Uracyst in this market are expected to remain slow until reimbursement status is received.

In July 2006, a licensing agreement was signed with Bio-Technic Romania Srl ("Bio-Techinc") for NeoVisc in Romania. Since receiving approval for sale in late February 2007, Bio-Technic has consistently improved their product orders over each period.

In August 2006, the Company received its CE Mark for NeoVisc in Europe. As a result, NeoVisc is now approved for sale in the 27 member countries of the European Community plus a number of non-member countries.

The Company signed a licensing and supply agreement with Watson Pharma, Inc. ("Watson") in December 2006 for Uracyst in the United States market. Under this agreement, Watson was granted an exclusive license to develop, market and sell Uracyst in the United States. In addition to an upfront payment made to the Company upon signing, this agreement will provide Stellar with milestone payments and an ongoing royalty stream from future sales of Uracyst in the United States. Watson will be responsible for conducting clinical trials and obtaining regulatory approvals for Uracyst in the United States. Watson has commenced a Canadian-based, placebo controlled, pilot clinical study in IC patients, which is expected to end in early 2008. The results of this study will be utilized in designing the pivotal Phase III safety and efficacy trial, the data from which will be submitted to the United States Food and Drug Administration (FDA) in support of marketing approval.

In November of 2007, the Company signed a licensing agreement with Torrex Chiesi Pharma GmbH, based in Vienna, Austria for the distribution and sale of NeoVisc in Eastern Europe. The territory covers a number of countries, including Austria, Czech Republic, Slovakia, Croatia, Serbia, Montenegro, Macedonia, Bosnia, Herzegovina, Poland, Hungary, Russia and the Commonwealth of Independent States.

Stellar was incorporated under the Business Corporations Act (Ontario) on November 14, 1994. The Companys registered office and executive offices are located at 544 Egerton Street, London, Ontario, Canada N5W 3Z8. The Companys telephone number is (519) 434-1540, its facsimile number is (519) 434-4382 and its e-mail address is stellar@stellarpharma.com.

Glossary

hyaluronate or HA- A naturally occurring polysaccharide, which by virtue of its viscosity and elasticity, acts as a lubricating and shock absorbing component in synovial fluids.  HA is the active ingredient in NeoVisc.

FDA- The Food and Drug Administration of the United States, which, among other functions, regulates medical devices and other therapeutic products used in the United States.

interstitial cystitis or IC- A chronic inflammation of the bladder wall.

NeoVisc®- A 2 mL pre-filled syringe of sterile 1.0% sodium hyaluronate solution used for the temporary replacement of synovial fluid in osteoarthritic joints. NeoVisc is the Companys proprietary product for the treatment for osteoarthritis.

osteoarthritis or OA- A degenerative disease associated with long-term wear primarily on weight bearing joints.

polysaccharide - A carbohydrate containing a large number of saccharide (sugar) groups. Starch is a common type of polysaccharide.

synovial fluid - A clear viscid fluid, the function of which is to lubricate the joint.

TPD- The Therapeutic Products Directorate of Health Canada, which, among other functions, regulates medical devices and other therapeutic products used in Canada.



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Uracyst®- A sterile 2.0% sodium chondroitin sulfate solution. Uracyst products are the Companys proprietary treatments for certain forms of GAG deficient cystitis such as IC and other non-common cystitis. The products are instilled by catheter directly into a patients bladder.

Uracyst® Test Kit- The Companys proprietary test kit that confirms the existence of bladder lining defects in IC patients and identifies those patients who should respond positively to Uracyst.

Development Strategy

Stellar focuses its product development activity around naturally occurring, well-studied (human body) chemicals and seeks novel applications in markets where its products demonstrate cost-effective therapeutic advantages. By using this development strategy, management of Stellar believes it can bring products with niche applications to unsatisfied, under-serviced markets with relatively low regulatory risk. In addition, management of the Company believes that a focus on in-licensing additional products focused on these same niche pharmaceutical markets improves its ability to compete with larger companies and gain significant market share for its products and licensed-in products. Stellar is also building revenues through out-licensing its current products to international markets.

Competition Generally

The pharmaceutical industry is highly competitive and is characterized by rapidly changing technology. The Company competes with other companies to market its products aimed at treating similar conditions. Many of these companies have substantially greater resources than the Company. There can be no assurance that the Company will continue to be able to compete with such companies or that developments by others will not render the Companys products or technologies non-competitive or obsolete. In order to maintain and improve its position in the industry, the Company must continue to enhance its current products, develop or acquire new products and product extensions and implement a comprehensive international sales and distribution marketing strategy. The Companys competition comes from a variety of sources, including companies, which target all, or a portion of the Companys current product offerings. See  Products and Markets. Also, many current and potential competitors of the Company may have greater name and brand recognition and more extensive customer bases that could be leveraged to gain market share to the Companys detriment. In addition, competitors may be able to complete the regulatory approval process sooner than the Company, and therefore market their products earlier than the Company can market certain of its products. If the Company is not able to compete effectively against current and future competitors, such failure may result in fewer customer orders, reduced gross margins and profitability and loss of market share, any of which would materially adversely affect the Company.

Competitive Advantages of Stellar

Management believes that Stellars main competitive advantages include:

(i)

the ability to conduct research and development and produce products in a cost-effective manner;

(ii)

a focus on the development of formulations and technologies targeted at smaller market niches that larger multi-national pharmaceutical companies have largely ignored because of size;

(iii)

the ability to offer cost-effective pricing while maintaining acceptable gross profit margins;

(iv)

the patents it holds for certain of its products; and

(v)

the ability to identify market needs and develop new niche products.

Products and Markets

Stellar has developed and currently markets the following three medical products: (i) NeoVisc, (ii) Uracyst and (iii) the Uracyst Test Kit. Each of these products is presently approved for use in Canada and the Companys sales are primarily in Canada. In addition, Stellar has signed an agreement for the distribution of an additional medical product, BladderChek, sales of which commenced in October 2004.



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NeoVisc

NeoVisc is a 2 mL pre-filled syringe of sterile 1.0% sodium hyaluronate solution used for the temporary replacement of synovial fluid in osteoarthritic joints. NeoVisc is classified in Canada by the TPD as a medical device under the Medical Devices Regulations of the Food and Drugs Act (Canada). NeoVisc is packaged, sold and marketed as a three injection therapy. The product is administered weekly by injection directly into the affected joint. This type of injection is called an intra-articular injection.

This type of treatment, referred to as viscosupplementation, is a relatively new therapy for the treatment of osteoarthritis, having gained Canadian approval in 1992 and United States approval in 1997. However, viscosupplementation has been used since the mid 1980s in many European markets. Replacing or supplementing the joint fluid provides symptomatic relief from the pain of osteoarthritis for up to 6 to 8 months before a repeat set of injections is required.

Osteoarthritis and Treatment Options: Osteoarthritis is a degenerative disease associated with long-term wear on weight bearing joints. With no known cure, it is estimated that OA affects an estimated 33% of persons over 45 years of age, and approximately 85% over the age of 70. The Canadian Arthritis Association estimates that 3 million Canadians suffer from the osteo form of arthritis. Stellar estimates the number of American OA sufferers at over 30 million. The aggregate number of patients with OA is expected to grow significantly as the average age of the population increases.

Current OA remedies focus on symptomatic relief and postponement of surgical intervention. These remedies include:

(i)

Drugs:

Pain killers such as aspirin, acetaminophen and other non-steroidal anti-inflammatory drugs (NSAID), such as naproxen and diclofenac, as well as new COX/2 Inhibitors;

(ii)

Steroidal

Anti-Inflammatory:

Corticosteroids are also used to treat the inflammation  associated with the disease; and

(iii)

Joint Replacement:

Surgical replacement with artificial joints.

Products such as NeoVisc have added a fourth non-pharmacological option in obtaining symptomatic improvements by supplementing the synovial fluid in the affected joint. NeoVisc can also be used in conjunction with drug treatments like NSAIDs, thereby reducing the overall cost of treatment, increasing clinical benefits and delaying or avoiding steroid use and joint replacement.

Role of Hyaluronate: The active ingredient in NeoVisc is hyaluronate, also referred to as hyaluronic acid or HA. HA is a naturally occurring polysaccharide found throughout the human body, which has been shown to play an important role in such biological processes as cell differentiation, tissue hydration and proteoglycans organization. Injected HA also provides an anti-inflammatory and analgesic effect. HA also plays a fundamental role in human joints, where by virtue of its viscosity, elasticity and other rheological properties, acts as a lubricating and shock absorbing component in joint fluids, and as an ocular lubricant. HA products are currently being used in eye surgery, wound healing, intra-articular injections and as an adjunct to certain grafting procedures.

Marketing Strategy: Purchase decisions in the prescription pharmaceutical market are influenced by the prescribing physician, pharmacist and end use patient/customer. State and private health care plans and patient user groups may also play a role in product/therapy selection, especially where the cost of therapy is high. In treating OA, it is typically the physician that decides which therapeutic option is best for the patient and which related products to use.

Stellars marketing and sales strategy focuses on those physicians currently prescribing HA viscosupplements. Stellar has created a database focused on orthopaedic surgeons, rheumatologists, sports medicine specialists and select general practitioners in Canada. Direct marketing to the physicians in this database has been, and will continue to be, effective in persuading treating physicians and specialists already using viscosupplementation to convert to NeoVisc or recommend it to their patients. Management of the Company believes that NeoVisc is at least as effective as any other competitive product and is the lowest cost intra-articular therapy currently on the market. Stellars strategy is to demonstrate that NeoVisc is the most cost-effective viscosupplement therapy available.

Competitive Analysis: The major competitive product to NeoVisc in Canada and the United States is Synvisc®, which is manufactured and sold by Genzyme Corp. Synvisc is a three injection dosage regime, which has been available in Canada since 1992 and in the United States since 1997. Synvisc is the dominant product in the viscosupplementation market. Management of Stellar estimates Synviscs market share at over 60% in the United States and 50% in Canada.



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If approved for sale in the United States, NeoVisc would also compete with Fidia, SpAs product, marketed under the trade name Hyalgan® by Sanofi-Synthelabo Inc. and Seikagakus product Supartz® marketed by Smith and Nephew, Orthovisc®, manufactured by Anika Therapeutics, Inc. and marketed by Johnson & Johnson. In Canada, NeoVisc also competes with Suplasyn®, manufactured by Bioniche Life Sciences Inc. With little to differentiate these HA products for use in the treatment of degenerative joint disease, management of the Company believes that Stellars lower patient cost and high quality will allow NeoVisc to effectively further penetrate the market and obtain a significant share in Canada and, if approved for sale, the United States.

As stated above, the Company has signed the following agreements for NeoVisc;

(i)

in June 2003, Stellar entered into a distribution agreement with BurnsAdler Pharmaceuticals (located in Charlotte, North Carolina), to distribute NeoVisc in Latin America and the Caribbean;

(ii)

in June 2004, Stellar entered into a distribution agreement with Triptibumus Sdn Bhd. for sale of NeoVisc in Malaysia, Singapore and Brunei;

(iii)

in August 2005, the Company signed a distribution agreement with Technimed for the sale of NeoVisc in Lebanon;

(iv)

in November 2005, with Al-Mohab Co. (Al-Mohab) for the sale of NeoVisc® in Kuwait;

(v)

in July 2006, a distribution agreement was signed with Bio-Technic Romania   SRL for NeoVisc® in Romania; and

(vi)

in November of 2007, the company signed a licensing agreement with Torrex Chiesi Pharma GmbH, based in Vienna, Austria for the distribution and sale of NeoVisc in Eastern Europe. The territory covers a number of countries, including Austria, Czech Republic, Slovakia, Croatia, Serbia, Montenegro, Macedonia, Bosnia, Herzegovina, Poland, Hungary, Russia and the Commonwealth of Independent States.

Uracyst and the Uracyst Test Kit

Stellar developed Uracyst, a sterile 2.0% sodium chondroitin sulfate solution available in a 20 mL vial and the Uracyst Test Kit, comprising Uracyst 2.0% and Solution K, a 3.0% potassium chloride solution. Uracyst and the Uracyst Test Kit are used in the diagnosis and treatment of certain forms of IC and non-common cystitis. The Uracyst Test Kit contains a 100 mL pouch of Solution K and a 20 mL vial of Uracyst. These products are instilled by catheter directly into a patients bladder.

Uracyst provides symptomatic relief for patients suffering from GAG deficient cystitis such as IC and non-common cystitis (including radiation-induced cystitis and hemorrhagic cystitis) by supplementing and replenishing deficiencies in the glycosaminoglycan (GAG) lining of the bladder wall. This GAG lining acts as a protective barrier between urine and the bladder wall. It protects the bladder wall against irritants and toxins (e.g., micro crystals, carcinogens and acid) in the urine and serves as an important defense mechanism against bacterial adherence.

Many researchers believe that a large number of IC patients (over 70%) have leaky or deficient GAG layers in their bladder. When Solution K is instilled in an IC patients bladder with GAG deficiencies, the patient experiences pronounced IC like symptoms. Instilling Uracyst into the bladder of those patients responding positively to the test immediately neutralizes the potassium induced symptoms. This test allows the clinician to determine which IC patient has a leaky GAG layer and therefore determine which these patients will more likely respond positively to Uracyst treatment to control their IC symptoms.

Uracyst is typically instilled weekly for 6 weeks, then once a month until symptoms resolve. Because these types of cystitis are typically chronic diseases of no known cause, patients will usually require re-treatment after a variable period of time when symptoms recur.

The Company has been issued a patent in the United States and Canada for the use of the Uracyst Test Kit and Uracyst treatments and has international patents pending. Uracyst and the Uracyst Test Kit are both classified in Canada by TPD as medical devices under the Medical Devices Regulations of the Food and Drugs Act (Canada).



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In order to obtain the necessary clinical work for the approval of Uracyst, Stellar entered into an agreement with Dr. Gary Steinhoff of Vancouver, British Columbia. Under this agreement, Dr. Steinhoff agreed to perform such work, on behalf of Stellar, in consideration for a declining variable royalty payable until August 31, 2008. The royalty is based upon a percentage of Uracyst net sales. The royalty percentage for the period which began on September 1, 2003 and ends on August 31, 2008 is 2%. Dr. Steinhoff is not otherwise affiliated with Stellar or any of its officers, directors or principal shareholders.

In December 2001, the Company entered into a license agreement (the European License) with Pohl-Boskamp of Hohenlockstedt, Germany. Under the European License, Pohl-Boskamp was granted the exclusive right to manufacture market and sell the Companys Uracyst product line in Europe. In consideration for the grant of such exclusive right, Pohl-Boskamp made cash payment to Stellar upon execution of the European License and at the time of Pohl-Boskamps first sale of Uracyst products in Europe, which occurred in December of 2003. Pohl-Boskamp is also obligated to pay the Company a royalty based on the quarterly net sales of Uracyst products by Pohl-Boskamp and its affiliates and sub-licensees. In April 2007, the Company terminated its license agreement with Pohl-Boskamp. Pohl-Boskamp disputed the basis on which the Company terminated the agreement and the consequences that result from such termination. The parties attended mediation in September 2007 where they agreed to a settlement of this dispute. Under the terms of the settlement the parties agreed that the license agreement will remain in full force and effect until March 31, 2008. The Company is currently in discussions with other potential partners for this market and expects to have a partner actively selling Uracyst in the European Community in the second quarter of 2008.

In addition, the Company signed the following agreements:

(i)

In September 2005, the company entered into a licensing agreement with Shanghai Ya Jun Medical for the sale of Uracyst in China.

(ii)

Stellar also entered into a licensing agreement in December 2005 with Mega Pharm for the sale of Uracyst in Israel.

(iii)

In December 2006, the Company signed a license and supply agreement with Watson who was granted an exclusive license to use certain of the Companys methods and technical know-how for the purposes of developing, marketing and selling Uracyst products in the United States.

Interstitial Cystitis and Treatment Options: Interstitial cystitis is a chronic inflammation of the bladder wall. Unlike common cystitis, IC is not caused by bacteria and does not respond to conventional antibiotic therapy. IC can affect people of any age, race or sex, but is more frequently diagnosed in women.

Interstitial cystitis causes some or all of the following symptoms:

Frequency:

Day and/or night frequency of urination (up to 60 times a day in severe cases). In early or very mild cases, frequency is sometimes the only symptom.

Urgency:

Pain, pressure or spasms may also accompany the sensation of having to urinate immediately.

Pain:

Can be abdominal, urethral or vaginal. Pain is also frequently associated with sexual intercourse.

Other:

Some patients also report experiencing symptoms such as muscle and joint pain, migraines, allergic reactions, colon and stomach problems, as well as the more common symptoms of IC described above.

At present, there is no cure for IC nor is there an effective treatment, which works for everyone. The following treatments have been used to relieve the symptoms of IC in some people: (i) diet, (ii) bladder distention, (iii) instilled dimethylsulfoxide (DMSO), heparin or HA, (iv) anti-inflammatory drugs, (v) antispasmodic drugs, (vi) antihistamines and (vii) muscle relaxants.

In severe cases, several types of surgery have been performed including bladder augmentation and urinary diversion. Products available for treating IC vary in their effectiveness. Most work for short periods of time and, in general, are effective in about 30% to 40% of patients. Some therapies can take up to 6 months of active treatment before patients start to show symptomatic improvement.



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Market For Uracyst and the Uracyst Test Kit: Data on the number of IC patients being treated and the method of treatment are not readily available in Canada or the United States. Many products such as dimethylsulfoxide (DMSO) and heparin are not used exclusively to treat IC. This lack of detailed end-use product and prescription data make it difficult to define the size of the IC market. An epidemiology study estimates the number of people in the United States with IC as being between 750,000 to 1,500,000 and in which Canada extrapolates to between 75,000 to 150,000 IC patients.

Marketing Strategy: Stellar currently markets Uracyst and Uracyst Test Kits directly to physicians and pharmacies (although in many cases the patient is the ultimate purchaser) in Canada. Stellar focuses its promotion to a core group of urologists currently treating interstitial cystitis, largely in major Canadian urban centers (i.e., all Provincial capitals and cities with medical teaching centers). Management estimates that there are over 550 practicing urologists in Canada and 7,500 in the United States. This well-defined target audience makes direct marketing an effective strategy for Stellar. Pursuant to the European License, Stellar markets its Uracyst product line in Europe through the European Licensee.

Uracyst has demonstrated a rapid onset of clinical response, compared to all other therapies. Combining this with lower cost is important, as most patients will be on and off GAG replacement therapy for an indeterminate amount of time. Management believes that the high efficacy results and low monthly therapy cost, make Uracyst the most cost effective therapy available. Stellar expects to gain acceptance more readily from both physicians and patients as the most cost-effective therapy for treating GAG-deficient IC patients.

Competitive Analysis: The treatment of IC is a relatively small niche market supplied by smaller pharmaceutical companies. Because of low efficacy rates and relatively expensive treatment costs for competitive products, management believes the treatment of IC remains an unsatisfied market with no dominant competitive product. Ortho McNeil Pharmaceutical, Inc and Shire Pharmaceutical Corporation are the two major suppliers to the IC market.

Ortho McNeil Pharmaceutical, Inc (Alza Corporation) has marketed Elmiron® (pentosan polysulfate sodium) in Canada since 1993. Elmiron is used as an oral GAG replenishment therapy. Alza Corporation has been active in the market providing comprehensive materials and services to physicians and IC patients. Side effects from the use of Elmiron are difficult to manage for some patients and can include hair loss, diarrhea and extreme to mild gastrointestinal discomfort.

Shire Pharmaceutical Corporations RIMSO 50Ò (also known as DMSO) was previously a market leader for urinary tract diseases, but has seen its market eroded by generic DMSO selling for a fraction of its price. Since DMSO may be used in treatments for diseases or symptoms other than IC, it is difficult to find exact usage data for DMSO in the treatment of IC. DMSO works to desensitize the bladder wall and has numerous negative side effects. The principal side effects include discomfort and an emission of a strong, unpleasant odor (similar to garlic) for up to 48 hours after an instillation. DMSO, although not favored by patients, remains a product of choice for many urologists.

Elmiron has a typical cost of about $150 month as compared to $80 month for DMSO and $65 month for Uracyst.

BladderChek

Stellar has licensed BladderChek for the Canadian market from Matritech, USA. The initial term of this licence began on January 1, 2004 and expires on December 31, 2008. Stellar may extend the term of the agreement for an additional one-year period. The BladderChek test is a simple to use, point-of-care, in vitro diagnostic test for bladder cancer, and provides results (within 30 minutes) while the patient is in the physician's office. By placing four drops of urine on the BladderChek test cassette, a physician is able to detect the presence of elevated NMP22.

The scientists that developed BladderChek, discovered that high levels of the nuclear matrix protein, NMP22, in urine frequently indicated the presence of cancer. This protein is found in the nuclei of cells where they contribute to nuclear structure and regulate important cell functions. NMP22 is elevated in bladder cancer cells 20 to 80 fold and is released into the urine of bladder cancer patients.

Market Overview:In the United States, more than one million patients receive a diagnostic work up for bladder cancer each year. Another 10 million are at risk for the disease. According to data released by the American Cancer Society in 2001, 54,300 new cases of bladder cancer (2.5:1 men: women) are diagnosed each year.

If diagnosed in its early stages, the five-year bladder cancer survival rate exceeds 90 percent. However, 12,400 people in the United States died of bladder cancer in 2001. Many died because the disease was not caught in its earliest stages.

The estimate for Canada is 270,000 opportunities for use (diagnosis and monitoring) for BladderChek.



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Market Growth:BladderChek, a third generation urine based biomarker, was able to correctly identify cancers not seen by cystoscopy and provides more accurate and clinically useful information than cytology. Stellar commenced selling BladderChek in October 2004 directly to hospitals and urology clinics where the overall value of a point of care device has been well received.

BladderChek is being sold at a competitive price to cytology, which is an important selling feature, given that BladderChek is 3 to 5 times more effective than cytology. The excellent clinical support combined with BladderChek ease of use and price point is one key to its early adoption in most centres. Stellar is currently working on moving BladderChek through the complex institutional protocols of the large teaching hospitals. Stellar expects to see a faster adoption as reimbursement issues are resolved in these larger hospitals.

Sales and Distribution

Stellar currently has six sales representatives, promoting its products in key Canadian centres. These sales representatives primarily target medical physicians, pharmacies, hospitals and patient support groups. Stellar is building a sales network across Canada to generate NeoVisc and Uracyst sales. See  Human Resources. Marketing and sales efforts are coordinated from Stellars office located in London, Ontario. Stellar will continue to build a strong network of representatives selling its products and in-licensed products in Canada.

As discussed above, Stellars product line has been out-licensed to companies in the United States, Western Europe, Eastern Europe, Romania, Russia, China, Israel, Middle East, Latin America, Caribbean, Malaysia, Singapore and Brunei.

Customers

The Company has historically derived the majority of its revenues from a small number of major customers, although the composition of this group of customers has changed from year to year. In the event that one or more of these major customers significantly reduce or terminate their purchases of the Companys products, the Companys results of operations and financial condition could be materially affected. The Company has not, however, received any indication from any of its current major customers that it intends to discontinue its relationship with the Company or to reduce its purchases of the Companys products.

Human Resources

The Company currently employs fourteen full-time employees. Eight of these employees are located at the Companys main office in London Ontario, Canada. The remaining six employees sell the Companys products in major urban areas throughout Canada. The Company plans to add additional staff in the areas of sales, marketing, regulatory affairs and administration over the next 18 to 24 months. Management of the Company believes that its relations with its employees are good.

The Company is substantially dependent on the services of its key senior management personnel. The Company has entered into an employment agreement with Peter Riehl, the Chief Executive Officer. See Item 10 - Executive Compensation of this annual report. Loss of the services of Mr. Riehl, or any other key management employee, would have a material adverse effect on the Company. The Company does not maintain key man life insurance on the life of Mr. Riehl. In addition, the Companys future success will depend in part upon its continuing ability to hire, train, motivate and retain key senior management and skilled technical and marketing personnel. The market for qualified personnel has historically been, and the Company expects that it will continue to be, intensely competitive.

Manufacturing

Stellar currently out sources the manufacturing of its products, other than Uracyst offered for sale in Europe, to a special sterile facility, operated by third party contractors. These facilities, which are in compliance with applicable Health Canada, TPD division medical device guidelines and current Good Manufacturing Practice ("cGMP") regulations, have sufficient excess capacity at present to meet the Companys short and long term objectives. A significant interruption in the supply of any of the Companys products could impair the successful marketing of such products.

As of April 1, 2008 the Companys products offered for sale in Europe will also be manufactured by these facilities.



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The Company has established non-contractual supply arrangements for its raw materials with several sources. Stellar currently purchases the HA used in NeoVisc from Fidia and the chondroitin sulfate used in the formulation of Uracyst from Bioiberica, a Spanish supplier. In the event of an interruption in the supply of these raw materials from such suppliers, the Company has a sourced a secondary supplier for the HA raw material and believes it would be able to secure similar raw materials at competitive prices from other suppliers located worldwide.

The manufacture of the Companys products involves the handling and use of substances that are subject to various environmental laws and regulations that impose limitations on the discharge of pollutants into the soil, air and water, and establish standards for their storage and disposal. The Company believes that the manufacturers of its products are in material compliance with such environmental laws and regulations.

The sale and use of the Companys products entails risk of product liability and the Company presently carries product liability insurance. There can be no assurance that, despite testing by the Company, as well as testing in use by current and potential customers and regulatory agencies, defects will not be found in new products after commencement of commercial shipments. The occurrence of such defects could result in the loss of, or delay in, market acceptance of the Companys products, which could have a material adverse effect on the Company. Furthermore, litigation, regardless of its outcome, could result in substantial costs to the Company, divert managements attention and resources from the Companys operations and result in negative publicity that might impair the Companys on-going marketing efforts.

Patent and Proprietary Protection

Where deemed appropriate, Stellar may file patent applications for technologies, which it owns or in respect of which it has acquired a license and, if necessary, then further developed to make such technologies marketable. Such applications may cover composition of matter, the production of active ingredients and their novel applications.

The Company retains independent patent counsel where appropriate. Management of the Company believes that the use of outside patent specialists ensures prompt filing of patent applications, as well as the ability to access specialists in various areas of patents and patent law to ensure complete patent filing.

The patent position relating to medical devices and drug development is uncertain and involves many complex legal, scientific and factual questions. While the Company intends to protect its valuable proprietary information and believes that certain of its information is novel and patentable, there can be no assurance that: (i) any patent application owned by or licensed to the Company will issue to patent in all countries; (ii) proceedings will not be commenced seeking to challenge the Companys patent rights or that such challenges will not be successful; (iii) proceedings taken against a third party for infringement of patent rights will be successful; (iv) processes or products of the Company will not infringe upon the patents of third parties; or (v) the scope of patents issued to or licensed by the Company will successfully prevent third parties from developing similar and competitive products. It is not possible to predict how any litigation may affect the Companys efforts to develop, manufacture or market products. The cost of litigation to uphold the validity and prevent infringement of the patents owned by or licensed to the Company may be significant.

Issues may arise with respect to claims of others to rights in the patents or patent applications owned by or licensed to the Company. As the industry expands, and more patents are issued, the risk increases that the Companys processes and products may give rise to claims that they infringe the patents of others. Actions could be brought against the Company or its commercial partners claiming damages or an accounting of profits and seeking to enjoin them from clinically testing, manufacturing and marketing the affected product or process. If any such action were successful, in addition to any potential liability for damages, the Company or its commercial partners could be required to obtain a license in order to continue to manufacture or market the affected product or use the affected process. There can be no assurance that the Company or its commercial partners could prevail in any such action or that any license required under any such patent would be made available or, if available, would be available on acceptable terms. If no license is available, the Companys ability to commercialize its products may be negatively affected. There may be significant litigation in the industry regarding patents and other intellectual property rights and such litigation could consume substantial resources. If required, the Company may seek to negotiate licenses under competitive or blocking patents, which it believes are required for it to commercialize its products.



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Although the scope of patent protection ultimately afforded by the patents and patent applications owned by or licensed to the Company is difficult to quantify, management of the Company believes that such patents will afford adequate protection for it to ensure exclusivity in the conduct its business operations as described herein. The Company also intends to rely upon trade secrets, confidential and unpatented proprietary know-how, and continuing technological innovation to develop and maintain its competitive position. To protect these rights, the Company whenever possible requires all employees and consultants to enter into confidentiality agreements with the Company. There can be no assurance, however, that these agreements will provide meaningful protection for the Companys trade secrets, know-how or other proprietary information in the event of any unauthorized use or disclosure. Further, in the absence of patent protection, the Companys business may be adversely affected by competitors who independently develop substantially equivalent or superior technology.

Regulatory Considerations

Product Regulation

The Canadian health care industry is regulated by TPD. This agency has a role similar to that of the FDA and has responsibility for regulating drugs for both human and animal use, cosmetics, radiation-emitting and other medical devices, and other products affecting human health. A manufacturer is required to follow the cGMP regulations in the manufacture of such products. Regulations imposed by federal, provincial, state and local authorities in Canada and the United States are a significant factor in the conduct of the development, manufacturing and eventual marketing activities for any proposed product.

Stellar has received a license to manufacture and sell NeoVisc, Uracyst and the Uracyst Test Kit in Canada from the TPD. These products are regulated under the Medical Devices Regulations of the Food and Drugs Act (Canada) and the regulations promulgated thereunder by TPD to ensure the safety and efficacy of medical devices for the Canadian public. The Company is in material compliance with all such regulations and was audited and approved ISO 13485:2003 certification on March 3, 2007.

Under the European authority, Stellar must gain approval for its products by complying with MDD regulations, which are similar to the Canadian system. Once approved in one of the member countries of the European Community ("EC"), Stellar can then apply for its CE mark. The CE mark amounts to an approval to sell in all of the 27 EC countries and allows for faster approvals in many other non-EC countries in Europe. NeoVisc is currently CE marked and Uracyst 20 mL, 2% is expected to be CE marked in 2008.

Stellar intends to market its products through its license agreement in the United States and, as such, it is important that a quality assurance program be designed to also comply with the FDAs Medical Device cGMP regulations. Through its out-licensing partnerships, the Company feels that its products can be submitted for approval under the Pre-Market Approval ("PMA") program of the FDA for marketing in the United States. The FDA GMP regulations require significant documentation on all relevant procedures of the manufacturing and quality control of each product submitted for approval.

Open label trials of Uracyst have been completed and published in The Canadian Journal of Urology. The Company is currently working with an American clinic in establishing an animal model to further demonstrate the role of Uracyst in the treatment of cystitis. In connection with the FDA approval process, Stellar anticipates that it will utilize such American clinics to perform additional services.

Stellar anticipates that the FDA approval required to market Uracyst in the United States will be obtained around the end of 2010. There can be no assurance, however, that such FDA approvals will be obtained or that Stellar or its United States licensee will be able to successfully market its products in the United States. The costs associated with obtaining such FDA approval for Uracyst is the responsibility of Watson.

Pricing and Reimbursement

As pressures for cost containment increase, particularly in Canada and the United States, there can be no assurance that the prices the Company can charge for its products will be as favorable as historical pharmaceutical product prices. Reimbursement by government and managed care organizations, and other healthcare payers, has become increasingly important, as has the listing of new products on large formularies, such as those of pharmaceutical benefit providers and group buying organizations. The failure of one or more products to be included on formulary lists, or to be reimbursed by government or managed care organizations, could have a negative impact on the Companys results of operation and financial condition.



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Other Laws and Regulations

Stellars operations are or may be subject to various federal, provincial, state and local laws, regulations and recommendations relating to the marketing of products and relationships with treating physicians, data protection, safe working conditions, laboratory and manufacturing practices, the export of products to certain countries and the purchase, storage, movement, use and disposal of hazardous or potentially hazardous substances. Although the Company believes its safety procedures comply with the standards prescribed by federal, provincial, state and local regulations, the risk of contamination, injury or other accidental harm cannot be eliminated completely. In the event of an accident, the Company could be held liable for any damages that result. The amount of such damages could have a materially adverse effect on the Companys results of operations, financial condition or liquidity.

Future Product Development

Stellar believes that a well-targeted research and development program constitutes an essential part of its activities. Stellar is currently developing a number of new product line extensions, with the intention of expanding the indications for its current products, NeoVisc and Uracyst, and, ultimately, expanding into other product areas. However, Stellars efforts will be focused initially on developing strategic partners to assist Stellar in gaining regulatory approval in the United States and other international markets for its NeoVisc and Uracyst related products. These submissions will be a priority for the Company, as management believes that these markets offer significant opportunities for the sale of the Companys products. The registration for all current products will likely require completion of clinical trials. Clinical work, done in Canada and the United States, can then be used for submissions for entry into other countries. As previously stated Stellar has signed an agreement for Uracyst in the United States with Watson. Watson is responsible to fund the FDA approval process for Uracyst. Stellar continues to search for suitable partners for NeoVisc in the United States.

For the years ended December 31, 2007 and 2006, the Company expensed approximately $102,754 and $217,607, respectively on in-house research and development activities. The expense in 2007 however, was offset by provincial government tax cash refunds of $80,746 and $77,276 for research and development activities preformed in 2004 and 2005, respectively.

Item 2.

Description of Property.

In 2004, the Company moved its main office to 544 Egerton Street in London, Ontario, Canada by purchasing the property and building located at such address for $450,000. In connection therewith, the Company has incurred costs to-date of $226,954 for renovations to the office, packaging and warehouse space of approximately 10,600 square feet in the aggregate contained in the building. Stellar believes that its existing property is in good condition and suitable for the conducting of its business.

Item 3.

Legal Proceedings.

Stellar may periodically become subject to legal proceedings and claims arising in connection in business. The Company does not believe that there were any claims outstanding against it as of the date of this report, which will have a material adverse effect on the Companys results of operations, financial condition and liquidity.

Item 4.

Submission of Matters to a Vote of Security Holders.

Not applicable.



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PART II



Item 5.

Market for Common Equity and Related Stockholder Matters.

Market Information

Since December 2002, the Companys common shares (Common Shares) have traded on the OTC Bulletin Board service of the National Association of Securities Dealers, Inc. (the OTC Bulletin Board). The Common Shares currently trade thereon under the symbol SLXCF. The following table sets forth the high and low per share sale price expressed in United States Dollars for the Common Shares as reported by the OTC Bulletin Board.

|     |  |                |  |           |  |     
|---- |  | -------------- |  | --------- |  | ----
|     |  |                |  | ($) (USD)
|     |  |                |  | High      |  | Low 
|     |  |                |  |           |  |     
|2007 |  | First Quarter  |  | 0.92      |  | 0.65
|     |  | Second Quarter |  | 0.87      |  | 0.60
|     |  | Third Quarter  |  | 0.72      |  | 0.47
|     |  | Fourth Quarter |  | 0.66      |  | 0.37
|2006 |  | First Quarter  |  | 1.38      |  | 0.86
|     |  | Second Quarter |  | 1.12      |  | 0.77
|     |  | Third Quarter  |  | 1.01      |  | 0.80
|     |  | Fourth Quarter |  | 1.22      |  | 0.70
|2005 |  | First Quarter  |  | 2.10      |  | 1.50
|     |  | Second Quarter |  | 1.80      |  | 1.10
|     |  | Third Quarter  |  | 1.40      |  | 1.01
|     |  | Fourth Quarter |  | 1.07      |  | 0.76

On March 30, 2008, the last reported per share sale price for the Common Shares on the OTC Bulletin Board was $0.47 (USD).

Since December 2000, the Common Shares have been listed and traded on the TSX Venture Exchange. The Common Shares are currently listed and trade on Tier 2 of the TSX Venture Exchange under the symbol SLX. The following table sets forth the high and low per share sale price expressed in Canadian Dollars for the Common Shares as reported by the TSX Venture Exchange.

|     |  |                |  |            |  |     
|---- |  | -------------- |  | ---------- |  | ----
|     |  |                |  | ($) (Cdn.)
|     |  |                |  | High       |  | Low 
|     |  |                |  |            |  |     
|2007 |  | First Quarter  |  | 0.75       |  | 0.73
|     |  | Second Quarter |  | 0.80       |  | 0.63
|     |  | Third Quarter  |  | 0.65       |  | 0.47
|     |  | Fourth Quarter |  | 0.54       |  | 0.40
|2006 |  | First Quarter  |  | 1.60       |  | 1.00
|     |  | Second Quarter |  | 1.20       |  | 0.86
|     |  | Third Quarter  |  | 1.00       |  | 0.86
|     |  | Fourth Quarter |  | 1.38       |  | 0.75
|2005 |  | First Quarter  |  | 2.45       |  | 1.80
|     |  | Second Quarter |  | 2.00       |  | 1.35
|     |  | Third Quarter  |  | 1.50       |  | 1.20
|     |  | Fourth Quarter |  | 1.20       |  | 0.85





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Holders

As at January 1, 2008, there were 27 holders of record of the Common Shares.

Dividends

The Company currently intends to retain future earnings, if any, for use in its business. The Company does not anticipate paying dividends on the Common Shares in the foreseeable future. Any determination to pay any future dividends will remain at the discretion of the board of directors of the Company (the Board of Directors) and will be made taking into account Stellars financial condition and other factors deemed relevant by the Board of Directors.

Equity Compensation Plan Information

The table set forth below provides information as of December 31, 2007 with respect to Common Shares that may be issued under the Companys existing equity plans. For additional information, see Item 10  Executive Compensation.



|                                                           |  |                                                                                              |  |                                                                                                    |  |                                                                                                                                               
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|Plan category                                              |  | Number of securities
to be issued upon
exercise of
outstanding
options, warrants 
and rights |  | Weighted average
exercise price 
of outstanding 
options, warrants 
and rightsin 
Canadian Dollars |  | Number of securities
remaining available
for future issuance
under equity 
compensation plans 
(excluding securities 
reflected in column (a))
|                                                           |  | (a)                                                                                          |  | (b)                                                                                                |  | (c)                                                                                                                                           
|                                                           |  |                                                                                              |  |                                                                                                    |  |                                                                                                                                               
|Equity compensation plans approved by security holders     |  | 355,000                                                                                      |  | 1.09                                                                                               |  | 1,699,452                                                                                                                                     
|                                                           |  |                                                                                              |  |                                                                                                    |  |                                                                                                                                               
|Equity compensation plans not approved by security holders |  |                                                                                             |  |                                                                                                   |  |                                                                                                                                              
|                                                           |  |                                                                                              |  |                                                                                                    |  |                                                                                                                                               
|Total                                                      |  | 355,000                                                                                      |  | 1.09                                                                                               |  | 1,699,452                                                                                                                                     



Exchange Controls and Other Limitations Affecting Security Holders.

Canada has no system of exchange controls. There are no exchange restrictions on borrowing from citizens or residents of foreign countries nor on the remittance of dividends, interest, royalties or similar payments, management fees, loan repayments, settlement of trade debts or the repatriation of capital.

Under the Investment Canada Act (the ICA Act), a Canadian federal statute, certain non-Canadian individuals, governments, corporations or other entities who wish to acquire a Canadian business (as defined in the ICA Act) or establish a new Canadian business (as defined in the ICA Act) may be required to file either a notification or an application for review with a governmental agency known as Industry Canada. The ICA Act further requires that certain acquisitions of control of a Canadian business by a non-Canadian must be reviewed and approved by the Minister responsible for the ICA Act on the basis that he is satisfied that the acquisition is likely to be of net benefit to Canada. Only acquisitions of control are reviewable under the ICA Act; however, the ICA Act provides detailed rules for the determination of whether control has been acquired and, pursuant to those rules, the acquisition of one-third or more of the voting shares of the Company may, in some circumstances, be considered to constitute an acquisition of control. Failure to comply with the review provisions of the ICA Act could result in, among other things, an injunction or a court order directing disposition of assets or shares.

There are no limitations on the rights of non-Canadian residents or non-Canadian shareholders to hold or vote the Common Shares contained in the Companys Articles of Incorporation, as amended, or By-Laws, as amended.



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Taxation

Dividends

In general, dividends paid by a corporation resident in Canada to non-residents of Canada are subject to Canadian withholding tax. The rate of withholding tax under the Income Tax Act (Canada) (the Tax Act) on dividends is twenty-five percent (25%). Such rate may be reduced under the provisions of a relevant international tax treaty to which Canada is a party. The Canada-United States Income Tax Convention (1980) (the U.S. Treaty) provides for a general reduction in the rate of Canadian withholding tax to fifteen percent (15%) on dividends paid on shares of a corporation resident in Canada to residents of the United States, and also provides that where the beneficial owner of the dividends is a corporation resident in the United States. Notwithstanding the foregoing, a reduced rate of (i) ten percent (10%) applies to dividends from a non-resident owned investment corporation if the recipient is a corporation that is the beneficial owner of at least ten percent (10%) of the voting shares of the corporation paying the dividends and (ii) five percent (5%) applies if the recipient is a corporation resident in the United States that is the beneficial owner of at least ten percent (10%) of the voting shares of the corporation paying the dividends.

Capital Gains

A non-resident of Canada is not subject to tax under the Tax Act in respect of a capital gain realized upon the disposition of a share of a public corporation for purposes of the Tax Act unless the share represents taxable Canadian property to the holder thereof. A share of a public corporation will be taxable Canadian property to the holder thereof if, at any time during the period of sixty (60) months immediately preceding a disposition, the non-resident, persons with whom the non-resident did not deal at arms length, or the non-resident together with persons with whom he did not deal at arms length, owned (or had an option in respect of or had an interest in) twenty-five percent (25%) or more of the issued shares of any class or series of the corporation or if, upon ceasing to be a resident of Canada, the holder elected that the share be taxable Canadian property. The Company is a public corporation for purposes of the Tax Act.

The U.S. Treaty provides that, in general, a resident of the United States will not be subject to tax on any capital gains realized by him on the disposition of shares that are taxable Canadian property unless (i) such resident has or had (within the twelve-month period preceding the disposition) a permanent establishment in Canada and such shares formed part of the business property of that permanent establishment, (ii) such shares formed part of the personal property pertaining to a fixed base which is or was available (within a twelve-month period preceding the disposition) to such resident for the purpose of performing independent personal services, (iii) the value of the shares is derived principally from real property situated in Canada or (iv) the shareholder is an individual who was resident in Canada for 120 months in any twenty-year period preceding the disposition and at any time during the ten-year period immediately preceding the disposition and who owned the shares of the corporation at the time he or she ceased to be a resident of Canada.

Estate and Gift Tax

At present, Canada does not impose any estate or gift tax.

Recent Sales of Unregistered Securities

Not applicable.

Issuer Purchases of Equity Securities.

During the fourth quarter of 2007, neither Stellar nor any affiliated purchaser (as defined in Rule 10b-18 promulgated under the United States Securities Exchange Act of 1934, as amended) (the Exchange Act) purchased any Common Shares.



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Item 6.

Managements Discussion and Analysis or Plan of Operation

Recent Accounting Pronouncements

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

(i)

SFAS No. 157.   In September 2006, the FASB issued SFAS No. 157 "Fair Value Measures." (SFAS No. 157),   SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact that the adoption of SFAS No. 157 will have on our future financial statements.

(ii)

SFAS No. 159. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS No. 159). SFAS No. 159 permits companies to choose to ensure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective for the company beginning in the first quarter of year 2008, although earlier adoption is permitted. The Company is currently evaluating the impact that the SFAS No. 159 will have on its financial statements.

(iii)

SFAS No. 160. In December 2007, the FASB issued SFAS No. 160, Non controlling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51. SFAS No. 160 establishes new accounting and reporting standards for the non controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a non controlling interest (minority interest) as equity in the consolidated financial statements and separate from the parents equity. The amount of net income attributable to the non controlling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its non controlling interest. SFAS No. 160 is effective for fiscal years, and interim periods beginning after January 1, 2009. The Company is currently evaluating the impact that the SFAS No. 160 will have on its financial statements.

(iv)

SFAS No. 161. In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133 (FAS 161). FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. The guidance in FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company is currently assessing the impact of FAS 161.

(v)

SFAS No. 141(R). In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations. SFAS No. 141(R) will significantly change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. It also amends the accounting treatment for certain specific items including acquisition costs and non controlling minority interests and includes a substantial number of new disclosure requirements. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The Company is currently evaluating the impact that the SFAS No. 141(R) will have on its financial statements.



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Year Ended December 31, 2007 Compared to Year Ended December 31, 2006 (in Canadian Dollars)

MANAGEMENT'S DISCUSSION AND ANALYSIS

This document was prepared on March 30, 2008 and should be read in conjunction with the December 31, 2007 financial statements of Stellar Pharmaceuticals Inc. ("Stellar" or the "Company").  All amounts are stated in Canadian dollars and have been rounded to the nearest 100thdollar.

General

The following discussion and analysis should be read in conjunction with the Companys financial statements and notes thereto appearing elsewhere in this annual report.  Such discussion and analysis contains forward-looking statements.  The Companys actual results may differ significantly from those projected in the forward-looking statements.  The Companys consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (GAAP).

FORWARD-LOOKING STATEMENTS

Readers are cautioned that actual results may differ materially from the results projected in any "forward-looking" statements included in this report, which involve a number of risks or uncertainties. Forward-looking statements are statements that are not historical facts, and include statements regarding the Companys planned research and development programs, anticipated future losses, revenues and market shares, planned clinical trials, expected future expenditures, the Companys intention to raise new financing, sufficiency of working capital for continued operations, and other statements regarding anticipated future events and the Companys anticipated future performance. Forward-looking statements generally can be identified by the words "expected", "intends", "anticipates", "feels", "continues", "planned", "plans", "potential", "with a view to", and similar expressions or variations thereon, or that events or conditions "will", "may", "could" or "should" occur, or comparable terminology referring to future events or results.

The Companys actual results could differ materially from those anticipated in these forward-looking statements as a result of numerous factors, including those listed under "Risks and Uncertainties", any of which could cause actual results to vary materially from current results or the Company's anticipated future results. The Company assumes no responsibility to update the information contained herein.

CRITICAL ACCOUNTING POLICIES

The SEC defines critical accounting policies as those that are, in managements view, important to the portrayal of our financial condition and results of operations and require managements judgment.  Our discussion and analysis of our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP").  The preparation of these statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses.  We base our estimates on experience and on various assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about our carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from those estimates.  Our critical accounting policies include:

Revenue Recognition.

Revenue is recognized in accordance with Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition of Financial Statements" and EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables." Accordingly, license fees which are comprised of initial fees and milestone payments are recognized upon achievement of the milestone and provided that collectibility is reasonably assured.   Revenue from the sale of products, net of trade discounts and allowances, is 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 the sale of its goods.

Share-Based Compensation

Share based compensation is estimated at the date of grant based on the fair value of the award and is recognized as an expense over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of the stock based awards on the grant date requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates.  The Company developed estimates based on historical data.  If factors change and different assumptions are employed in future periods, the compensation expense that we record may differ significantly from what we have recorded in the current period.  A small change in the estimates used may have a relatively large change in the estimated valuation.  The Company uses the Black-Scholes pricing model to value stock option awards.



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OVERVIEW

Stellar founded in 1994, is a Canadian pharmaceutical company involved in the development and commercialization of high quality, polysaccharide-based therapeutic products used in the treatment of osteoarthritis and certain types of cystitis.  Stellar also markets a test kit that confirms the existence of bladder lining defects in interstitial cystitis ("IC") (an inflammatory disease of the urinary bladder wall) patients and helps identify those patients who should respond positively to the Companys proprietary therapeutic product.  Stellars product development strategy focuses on seeking novel applications for its product technologies in markets where its products demonstrate true, cost-effective therapeutic advantages. Stellar is also building revenues through in-licensing products for Canada that are focused on similar niche markets and out-licensing to international markets.

Stellar has developed and is marketing three products in Canada based on its core polysaccharide technology:

(i)

NeoVisc®, for the treatment of osteoarthritis;

(ii)

Uracyst®; for the treatment of IC: and

(iii)

Uracyst® Test Kit, Stellars patented technology for the diagnosis of IC.

Stellar also has acquired the exclusive Canadian marketing and distribution rights for: Matritechs, NMP22® BladderChek® ("BladderChek"), a proteomics-based diagnostic test for the diagnosis and monitoring of bladder cancer.  Stellar began selling BladderChek in Canada in October 2004. BladderChek has had a small impact on sales for 2007, but is expected to play a larger part in the sales mix going forward as reimbursement issues are resolved.

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 received a combination of non-recurring, non-refundable license fees and royalty payments.  In April 2007, the Company terminated its license agreement with G. Pohl-Boskamp GmbH & Co. ("Pohl-Boskamp"), which provided for the sale of Uracyst products in Europe. Pohl-Boskamp disputed the basis on which the Company terminated the agreement and the consequences that result from such termination. The parties attended mediation in September 2007 in which an agreement was reached and a settlement made. Under the terms of the settlement the parties agreed that the license agreement will remain in full force and effect until March 31, 2008.  Further, Pohl-Boskamp agreed to pay Stellar the sum of €200,000 (Cdn$283,920), payable in two equal installments of €100,000 due on September 20, 2007 and December 31, 2007.  The Company has recorded the $283,920 in the following manner: 1) $210,220 as an offset for expenses incurred in regards to the termination and mediation processes which has been recorded as a reduction to selling, general and administration expense; 2) the remaining $73,700 has been recorded as Interest and other income.

In June 2003, Stellar entered into distribution agreements with BurnsAdler Pharmaceuticals to sell Stellars products in Latin America and the Caribbean. Sales have been ongoing in the Dominion Republic and Bahamas, two of the smaller territories included in the territory, but progress has been slow in the major Latin American markets due to competitive pricing issues.

In October 2003, the Company entered into an exclusive distribution agreement with Matritech, Inc., to sell BladderChek in the Canadian market.  In October 2004, Stellar commenced selling BladderChek in Canada.

In June 2004, Stellar entered into a NeoVisc licensing agreement with Triptibumis Sdn. Bhd. (Triptibumis) for Malaysia, Singapore and Brunei.  Triptibumis has obtained reasonable success in this small, competitive market.  New areas of the territory however, have been slow in receiving regulatory approval.  Although it can not be certain, it is expected that some of these territories should receive approval in the first half of 2008.  The term of this agreement has been extended until June 30, 2010.

In July 2005, the Company entered into a license agreement with Innogen Ilac for the sale of NeoVisc in Turkey. In August 2005, the Company entered into a distribution agreement with Technimed for the sale of NeoVisc in Lebanon and Jordan.  Although this is a small market, Technimed sales have increased by 120.6% in 2007 over sales in 2006.

In September 2005, the Company entered into a licensing agreement with Shanghai Ya Jun Medical for the sale of Uracyst in China.  All product specifications have been approved by the Chinese regulatory body ("SFDA") and the final document submission was delivered to the SFDA in June 2007.  Although the Company anticipated this registration would have occurred in 2007, to-date such approval has not been granted. The Company is hopeful that final approval by SFDA will received in the first half of 2008.  Stellar also entered into a licensing agreement with Al-Mohab Co. for the sale of NeoVisc in Kuwait in November 2005 with a small order occurring in the early part of 2007.



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In November 2005, the Company entered into a license agreement with Al-Mohab Trading & Contracting for the sale of NeoVisc in Kuwait.

In December 2005, the Company entered into a licensing agreement with Megapharm for the sale of Uracyst in Israel. While Uracyst has received regulatory approval from the ministry of health; it still lacks approval on the reimbursement formulary. Sales for Uracyst in this market are expected to remain slow until reimbursement status is received.

In July 2006, a licensing agreement was signed with Bio-Technic Romania Srl ("Bio-Techinc") for NeoVisc in Romania. Since receiving approval for sale in late February 2007, Bio-Technic has consistently improved their product orders over each period.

In August 2006, the Company received its CE Mark for NeoVisc in Europe. As a result, NeoVisc is now approved for sale in the 27 member countries of the European Community plus a number of non-member countries.

The Company signed a licensing and supply agreement with Watson Pharma, Inc. ("Watson") in December 2006 for Uracyst in the United States market. Under this agreement, Watson was granted an exclusive license to develop, market and sell Uracyst in the United States.  In addition to an upfront payment made to the Company upon signing, this agreement will provide Stellar with milestone payments and an ongoing royalty stream from future sales of Uracyst in the United States.  Watson will be responsible for conducting clinical trials and obtaining regulatory approvals for Uracyst in the United States.  Watson has commenced a Canadian-based, placebo controlled, pilot clinical study in IC patients, which is expected to end in early 2008. The results of this study will be utilized in designing the pivotal Phase III safety and efficacy trial, the data from which will be submitted to the United States Food and Drug Administration (FDA) in support of marketing approval.

In November of 2007, the Company signed a licensing agreement with Torrex Chiesi Pharma GmbH, based in Vienna, Austria for the distribution and sale of NeoVisc in Eastern Europe.  The territory covers a number of countries, including Austria, Czech Republic, Slovakia, Croatia, Serbia, Montenegro, Macedonia, Bosnia, Herzegovina, Poland, Hungary, Russia and the Commonwealth of Independent States.

Stellar markets its products in Canada through its own direct sales force of commissioned and salaried sales people. The Companys focus on product development continues to be both in-licensing and out-licensing for immediate impact on the revenue stream allowing Stellar to fund its own in-house product development for future growth and stability.

RESULTS FOR THE THREE AND TWELVE MONTH PERIODS ENDED DECEMBER 31, 2007

Total income from all sources for the year ended December 31, 2007 decreased by 44.3% to $2,460,300 compared to $4,420,600 in the same period during 2006.  When revenue for 2006, is adjusted for the one time licensing fee received from Watson of $2,539,900, the revenues for 2007 show a comparative increase of 30.8%. For the three month period ending December 31, 2007, total operating revenue from all sources (when adjusted for the one time licensing fee from Watson received in December 2006) was up 30.1%.

NeoVisc sales in the Canadian market were up for the three and twelve month periods ended December 31, 2007, 10.1% and 10.0%, respectively over the same periods for 2006. International sales for NeoVisc for the three and twelve month periods ended December 31, 2007, were up by 153.8% and 106.0% compared to  the same periods for 2006 as approvals and demand for NeoVisc has increased in international markets.

Uracyst sales have grown for the three and twelve month periods ended December 31, 2007, 4.5% and 15.8%, respectively, compared to the same periods of 2006, as Canadian urologists confidence in the product continues to build. The marginal growth for the quarter was impacted by the recruitment for the multicenter trial being conducted in Canada by Stellars United States licensee, Watson.

BladderChek sales continue to be hampered by reimbursement issues and sales volumes for the three and twelve month periods ending December 31, 2007 declined by 35.7% and 37.4% respectively compared to the same periods in 2006. Reimbursement issues and institutional financial constraints imposed by provincial governments. Marketing efforts focused on these issues are expected to reverse this trend in 2008.



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Gross Profit and Cost of Products Sold

Cost of products sold is calculated exclusive of amortization of $93,600 (2006-$107,500), and other items of $20,100 (2006 - $36,500), which is a non-GAAP measure. When adjusted for the one time licensing fee received in 2006, gross profit for the twelve month period ending December 31, 2007 was up 32.7% to $1,821,600 compared to the same period in 2006 of $1,373,200. For the three month period ending December 31, 2007 the adjusted gross profit was up 36.6% to $554,100 compared to the same period in 2006 of $405,600. This improvement in gross profits was driven by the positive sales growth in domestic and international markets, and a continued improvement in Stellars cost of goods sold for the above period. Stellars cost of goods sold for the 12 month period ended December 31, 2007 was 25.6 % of sales compared to 32.0% of sales for the same period in 2006.

Write-down of Obsolete Inventory

The Company recorded $20,100 as obsolete inventory which was written down in the twelve month period ending December 31, 2007  compared to $7,300 write-down of obsolete inventory for the same period in 2006.

Research and Development

Stellar continues to invest in research which is essential to advancing the use of its products in Canada and in international markets. For the twelve month period ended December 31, 2007, the Company recorded $102,800 (2006 - $217,600) in research and development expenses before reductions of tax credits. Government tax credits are recorded as a reduction of the expense when reasonable assurance exists that the Company has complied with the terms and conditions for the approval of the credit.  In prior years, the Company determined the collection of the tax credit was less than likely.  The expense recorded in 2007, was offset by provincial government tax credits of $158,000 from prior years, which the government has now assessed and approved.

During 2007, the Company continued its development of manufacturing processes to improve yields from both Uracyst and NeoVisc production. In the last quarter of 2007, the Company also added a new packaging line to the Egerton Street facility to better accommodate packaging requirements for international markets. This work is expected to improve Stellars competitiveness in the global market.

In 2007, the Company continued to work with Dr. Robert Hurst from the University of Oklahoma on Uracyst and its treatment of GAG deficient cystitis. Although it can not be certain, it is expected that Dr. Hursts work will further enhance Uracyst treatment of this bladder defect.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the year ended December 31, 2007 was $2,090,500 compared to $2,332,500, for the same period in 2006. The total decrease of $242,000 includes a reduction of $81,100 in costs related to non-cash expenses for stock options issued to consultants and the directors, officers and employees of the Company which was reduced to $31,100 (2006 - $112,200) and a reduction of $233,700 ((2007  nil) (2006 - $233,700)) for consulting fees related to the Watson license agreement. This decrease was offset by an increase of costs to selling, general and administrative expenses of $82,800. During the year ended December 31, 2007, the Company paid fees to its board of directors totaling $41,000 (2006 - $42,000), respectively.

Stellar is pursuing a number of business development activities associated with out-licensing Stellars current products in other international markets, in-licensing products for Stellars markets and developing additional products.

Interest and Other Income

Interest and other income during the three and twelve month periods ended December 31, 2007 was $41,400 and $213,000 (2006 - $15,400 and $42,900), respectively. These amounts include interest received on short-term investments for both 2007 and 2006. Cash will be maintained in liquid investments. Other income is comprised of the difference in the value of funds received for Pohl Boskamp related to the settlement agreement of $283,900, less $210,200 expenses incurred in regards to the termination and mediation processes, with the remaining $73,700 in funds recorded as other income.  Expenses related to the settlement of this agreement where recorded as a reduction of selling, general and administrative expenses.



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SUMMARY OF QUARTERLY RESULTS



|                                                          |   |           |  |                 |           |                           |   |        | 
|--------------------------------------------------------- | - | --------- |  | --------------- | --------- | ------------------------- | - | ------ | 
|Quarter Ended                                             |   | Revenues  |  | Net Income
Loss |           | Earnings
(loss) per share
|December 31, 2007                                         | $ | 657,700   |  | $               | 67,200    |                           | $ | 0.00  
|September 30, 2007                                        |   | 615,400   |  |                 | 135,400   |                           |   | 0.01  
|June 30, 2007                                             |   | 554,500   |  |                 | (88,600)  |                           |   | (0.00)
|March 31, 2007                                            |   | 419,700   |  |                 | (261,400) |                           |   | (0.01)
|December 31, 2006*                                        |   | 3,061,600 |  |                 | 2,120,300 |                           |   | 0.09  
|September 30, 2006                                        |   | 429,900   |  |                 | (278,800) |                           |   | (0.01)
|June 30, 2006                                             |   | 440,300   |  |                 | (232,300) |                           |   | (0.01)
|March 31, 2006                                            |   | 445,900   |  |                 | (354,000) |                           |   | (0.02)
|                                                         
|* Includes one-time license fee income of Cdn$2.5 million

SELECTED FINANCIAL RESULTS AND HIGHLIGHTS

A discussion of the reasons behind the variations in the following amounts can be found under the heading Results of Operations for the Three and Twelve Month Periods Ended December 31, 2007.



|                                                                                                  |   |              |  |              |           |              |   |             | 
|------------------------------------------------------------------------------------------------- | - | ------------ |  | ------------ | --------- | ------------ | - | ----------- | 
|Income Statement for the year ended                                                               |   | Dec 31, 2007 |  | Dec 31, 2006 |           | Dec 31, 2005
|Total revenue                                                                                     | $ | 2,247,300    |  | $            | 4,377,700 |              | $ | 1,942,300  
|Cost of goods sold                                                                                |   | 405,500      |  |              | 419,700   |              |   | 450,600    
|Other product costs / write-down                                                                  |   | (20,200)     |  |              | 36,500    |              |   | 159,400    
|Expenses                                                                                          |   | 2,182,100    |  |              | 2,709,200 |              |   | 3,172,500  
|Net income (loss)                                                                                 |   | (147,400)    |  |              | 1,255,300 |              |   | (1,740,500)
|- basic                                                                                           |   | (0.01)       |  |              | 0.05      |              |   | (0.08)     
|- diluted                                                                                         |   | n/a(1)       |  |              | 0.05      |              |   | n/a(1)     
|                                                                                                  |   |              |  |              |           |              |   |            
|Notes:
(1)The diluted loss per share has not been computed, as the effect would be anti-dilutive.



|                                          |   |              |  |              |             |              |   |             | 
|----------------------------------------- | - | ------------ |  | ------------ | ----------- | ------------ | - | ----------- | 
|Balance Sheet as at                       |   | Dec 31, 2007 |  | Dec 31, 2006 |             | Dec 31, 2005
|Cash and cash equivalents                 | $ | 3,211,100    |  | $            | 3,515,200   |              | $ | 2,108,800  
|Total assets                              |   | 4,890,200    |  |              | 4,948,400   |              |   | 3,713,500  
|Total liabilities                         |   | 417,400      |  |              | 362,700     |              |   | 653,800    
|Cash dividend declared per share          |   | -            |  |              | -           |              |   | -          
|Shareholders equity                      |   |              |  |              |             |              |   |            
|- capital stock                           |   | 8,303,000    |  |              | 8,299,600   |              |   | 8,100,200  
|- paid in capital                         |   | 746,400      |  |              | 715,300     |              |   | 643,900    
|- deficit                                 |   | (4,576,600)  |  |              | (4,429,200) |              |   | (5,684,400)
|Total liabilities and shareholders equity |   | 4,890,200    |  |              | 4,948,400   |              |   | 3,713,500  

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $3,211,100 at December 31, 2007 as compared with $3,515,200 at December 31, 2006.

At December 31, 2007, the Company did not have any outstanding indebtedness.

While the Company has generated royalty revenue and revenue from the distribution of pharmaceutical products in Canada, this revenue has been insufficient to fund the Companys research, development and marketing activities. Accordingly, the Company continued to incur losses in 2007 and drew from its holdings of cash and cash equivalents. Although there can be no assurance, the Company does expect to move towards a profitable status in 2008, thereby funding its future growth from the sale of its products, milestone payments and royalty income resulting from out-licensing agreements for at least the next 12 months.



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Contributing to this decrease in cash was:

·

Capital expenditures of $79,000 related to the setup of the packaging facility and manufacturing equipment

·

Capital expenditures of $26,000 related to building structure repairs

·

Capital expenditures of $9,400 related to new computer systems

·

Capital expenditures of $7,100 related to patent filings

·

Research and development costs of  $102,800 (non-exclusive of tax credits)

·

Funds issued related to the loan receivable of $17,000

The Company may seek additional funding, primarily by way of one or more equity offerings, to carry out its business plan and to minimize risks to its operations. The market for equity financing for companies such as Stellar is challenging and there can be no assurance that additional funding will become available by way of equity financing. Any additional equity financing may result in significant dilution to the existing shareholders at the time of such financing. The Company may also seek additional funding from other sources, including technology licensing, co-development collaborations, and other strategic alliances. Such funding, if obtained, may reduce the Companys interest in its projects or products. Regardless, there can be no assurance that any alternative sources of funding will be available to the Company.

OFF-BALANCE SHEET ARRANGEMENTS

The Company does not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

RELATED PARTY TRANSACTIONS

The Company entered a fiscal advisory and consulting agreement in December 2005 with LMT Financial Inc. ("LMT") (a company beneficially owned by a director and his spouse) for, among other things, services to be provided in 2006 and 2007. Compensation under the agreement is $6,000 per month or $72,000 for 2007.  Pursuant to this agreement, LMT assists and will continue to assist the Company in assessing available methods of financing the operations of the Company and the impact on the market for Common Shares in the United States created by developments in Stellars business.

CAPITAL STOCK

The Company has authorized an unlimited number of Common Shares, without par value. There are no other classes of shares issued. During the year ended December 31, 2007, the Company issued 3,500 Common Shares to consultants for services provided in 2006.  As of the date of this report, the Company has 23,822,540 Common Shares issued and outstanding.

As of the date of this report, the Company had 355,000 Common Share options outstanding at various exercise prices and expiry dates.

SIGNIFICANT CUSTOMERS

During 2007, the Company had one significant customer, a national wholesaler, which represented 36.0% of sales, in comparison to 36.0% in the same period for 2006.

OUTLOOK

As at March 25, 2008, the Company is debt free and had working capital of $3,042,385. Management remains confident that it can continue to fund its ongoing operations from several sources, including the sale of its products, milestone payments and royalty income resulting from out-licensing agreements for at least the next 12 months.

As discussed above under the heading "Liquidity and Capital Resources," the Company may seek additional funding, primarily by way of one or more equity offerings, to carry out its business plan and to minimize risks to its operations.



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RISKS AND UNCERTAINTIES

Stellar is subject to risks, events and uncertainties, or "risk factors", associated with being both a publicly-traded company operating in the biopharmaceutical industry, and as an enterprise with several projects in the research and development stage. Such risk factors could cause reported financial information to not necessarily indicate future operating results or future financial position. The Company cannot predict all of the risk factors nor can it assess the impact, if any, of such risk factors on its business, or the extent to which any factor, or combination of factors, may cause future results or financial position to differ materially from those reported or those projected in any forward-looking statements. Accordingly, reported financial information and forward-looking statements should not be relied upon as a prediction of actual future results.

Some of the risks and uncertainties affecting the Company, its business, operations and results include, but are not limited to: the Companys dependence on a few customers and a few suppliers, the loss of any of which would negatively impact the Companys operations; the need to develop and commercialize new products which will require further time-consuming and costly research and development, the success of which cannot be assured; the Companys dependency on third parties for manufacturing, materials and for research, development and commercialization assistance and support; the Companys dependency on assurances from third parties regarding licensing of proprietary technology owned by others; government regulation and the need for regulatory approvals for both the development and commercialization of products, which are not assured; uncertainty that the Companys products will be accepted in the marketplace; rapid technological change and competition from pharmaceutical companies, biotechnology companies and universities, which may make the Companys technology or products obsolete or uncompetitive; the need to attract and retain skilled employees; risks associated with claims of infringement of intellectual property and of proprietary rights; risks inherent in manufacturing (including up-scaling) and marketing; product liability and insurance risks; risks associated with clinical trials, including the possibility that trials may be terminated early, delayed or unsuccessful; exchange rate fluctuations; political, economic and environmental risks; the need for performance by buyers and suppliers of products; the Companys dependency on performance by its licensees regarding the sale of our licensed-out products, NeoVisc and Uracyst; and the risk of unanticipated expenses or unanticipated reductions in revenue, or both, any of which could cause the Company to reduce, delay or divest one or more of its research, development or marketing programs.

In addition to the foregoing, the industry in which the Company operates is very competitive. Many of our competitors and potential competitors have substantially greater product development capabilities, experience conducting clinical trials and financial, scientific, manufacturing, sales and marketing resources and experience than the Company.  The pharmaceutical industry is an industry of innovation and change, which can change the competitive landscape rapidly.  This could result in a material adverse affect on the financial condition of the Company.

The Company currently outsources the manufacturing of its products to a third party contract manufacturer, located in Toronto, Ontario. Although the Company has taken several measures to control the quality and on-time delivery of its products by this manufacturer, Stellar is unable to control all aspects of its third party manufacturer's operations.  If a supplier of a product or component discontinued or restricted such supply, the Companys business may be harmed by the resulting delays.  This could result in a material adverse affect on the financial condition of the Company.

While management has some experience conducting business activities with international accounts, the Company is subject to a number of risks associated with international accounts that may increase the Company's costs, lengthen sales cycles, and require significant management attention.  International accounts carry certain risks associated with foreign currency fluctuations; exchange controls; uncertainties of laws and enforcement relating to the protection of intellectual property; and other factors, depending on the country involved.  There can be no assurance that the Company will not experience these factors in the future, or that they will not have a material adverse affect on the Company's business, results of operations or financial condition.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Companys Chief Executive Officer and Chief Financial Officer, on a timely basis so that appropriate decisions can be made regarding public disclosure.



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As at the end of 2007, management of the Company, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the Companys disclosure controls and procedures as required by United States and Canadian securities laws.  Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that as of the end of 2007, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Companys annual filings and interim filings and other reports filed or submitted under the United States and Canadian securities laws is recorded, processed, summarized and reported within the time periods specified by those laws and that material information is accumulated and communicated to management of the Company, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

ADDITIONAL INFORMATION

Additional information relating to the Company is available on SEC at www.sec.gov, SEDAR at www.sedar.com or visit Stellars website at www.stellarpharma.com.

Item 7.

Financial Statements.

The financial statements of the Company for 2007 (the Companys 2006 financial statements were audited by Mintz & Partners, LLP Chartered Accountants), including the notes thereto, together with the report thereon of Deloitte & Touche, LLP Chartered Accountants are attached to the end of this annual report and are hereby incorporated herein by reference.

Item 8.

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.



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Item 8A.

Controls and Procedures.

Within the 90-day period prior to the Companys filing of this annual report, an evaluation was carried out under the supervision and with the participation of the Companys management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures (as defined in Rule 13a-15 and 15d-15 under the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that those disclosure controls and procedures were adequate to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and regulations promulgated there under. There have been no significant changes in the Companys internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

Item 8B.

Other Information.

Not applicable.

Item 9.

Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.

Directors and Executive Officers

The following table sets forth certain information with respect to the directors and executive officers of Stellar as of the date of this report.

|                 |  |     |  |                                                 | 
|---------------- |  | --- |  | ----------------------------------------------- | 
|Name             |  | Age |  | Positions                                       | 
|                 |  |     |  |                                                
|Peter Riehl      |  | 62  |  | Director, President and Chief Executive Officer
|Arnold Tenney    |  | 65  |  | Chairman of the Board and Financial Advisor    
|John J. Kime     |  | 65  |  | Director                                       
|Robert H. Kayser |  | 65  |  | Director                                       
|John M. Gregory  |  | 55  |  | Director                                       
|Janice M. Clarke |  | 47  |  | Chief Financial Officer                        

Set forth below are brief biographies of the Companys directors and officers. All of the directors and executive officers of the Company have held their principal occupations indicated below for the past five years unless otherwise noted.

Peter Riehl, President, Chief Executive Officer and Director. Peter Riehl joined the Company in 1996. Mr. Riehl has over 30 years experience in the Canadian and international pharmaceutical markets. He was a former director of sales and marketing for Fisons Corp. Ltd. in Canada responsible for the commercial side of their pharmaceutical business in Canada. His experience covers sales, marketing, business development and logistics in the pharmaceutical industry. In 1993, Mr. Riehl was Chairman of the prescription drug sector of the Canadian Wholesale Drug Association. He is also a former director of sales and marketing for Bioniche Life Sciences Inc. Mr. Riehl has been involved in numerous professional and industry related training programs and has a Diploma in Business Administration from Conestoga College, Kitchener and studied marketing at York University, Toronto.

Arnold Tenney, Chairman of the Board and Financial Advisor.  Since 2002, Arnold S.. Tenney has been a financial consultant at Devine Entertainment Corporation ("Devine"), a children and family film production and development company. Prior to his position at Devine Mr. Tenney was Chief Executive Officer of ARC International Corporation from 1978 to 2000. ARC International Corporation was a developer of indoor ice arenas and tennis clubs, as well as an investment company involved in entertainment and cable television whose shares were traded on the American Stock Exchange until its liquidation in 2000. Mr. Tenney was a director and Chairman of the Board of Cabletel Communications from 1985 to 2000, which is a leading supplier of broadband equipment to the cable television industry whose shares currently trade on both the Toronto and American Stock Exchanges. Mr. Tenney was a director of Ballantyne of Omaha, Inc. from 1988 to 2000 and served as Chairman of the Board from 1992 to 2000. Ballantyne of Omaha, Inc. is a leading manufacturer of commercial motion picture projection equipment whose shares trade on the American Stock Exchange. Mr. Tenney served as a director for Phillip Services Inc., a Canadian metal recycling company, from 1998 to 2000. He served in the capacity as a representative of Mr. Carl Icahn.



25



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Robert H. Kayser, Director. Robert H. Kayser spent 29 years in positions of increasing responsibility with Medtronic, Inc., the world's leading medical technology company providing lifelong solutions for people with chronic disease. He retired in 2001 as Director of Global Marketing, Cardiac Surgery Products, in Grand Rapids, MI. During his four-year tenure in this position, Mr. Kayser introduced more than 20 new products, and increased product revenue and market share. Prior to this, he served as Vice President, Pacing and Customer Education in Lausanne, Switzerland, where he implemented brand strategies and European customer education activities that resulted in higher market share for Medtronics cardiac pacing and electrophysiology product lines. From 1993-1996, he was General Manager, Medtronic UK, where he was responsible for all businesses and functions.

John J. Kime, Director. John J. Kime has been a Director of the company since December 2000. Mr. Kime is the President and CEO of iBD Advisors Inc., a privately owned Canadian company providing guidance to Canadian and international companies on site location needs and business considerations connected with their plans to locate and expand in North America. Prior to assuming his responsibilities at iBD Advisors, Mr. Kime was the President and CEO of the London Economic Development Corporation a public/private partnership with responsibility for providing economic development services to the city of London, Ontario, Canada. From 1991 to 1998, Mr. Kime served as Director of International Development for Big O Inc., a company engaged in the development of manufacturing technologies used in the control and containment of water, chemicals and other substances. Mr. Kime has a BA from The University of Western Ontario, and is a Chartered Accountant.

John M. Gregory, Director. Mr. Gregory is managing partner of SJ Strategic Investments, LLC. a private, family-owned investment vehicle with a diverse portfolio of public and private investments. Mr. Gregorys leadership aschairman and CEO of King Pharmaceuticals helped the company grow from a 90-employee family business to an S&P 500 Index company on the New York Stock Exchange with revenues exceeding $1 billion. Mr. Gregory is a graduate from the University of Maryland with a degree in pharmacy.

Janice M. Clarke, Chief Financial Officer. Ms. Clarke has over twenty years of office administration and financial management experience with proven abilities to implement and manage various financial systems and office procedures. Ms. Clarke joined Stellar Pharmaceuticals Inc. in August 2000 and currently manages its administrative and financial processes.

Board of Directors

The Board of Directors consists of five members. Directors serve for terms of one year or until their successors are duly elected or appointed.

Committees of the Board of Directors

The Company has established an Audit Committee and a Compensation Committee of the Board of Directors.

Audit Committee

The Audit Committee consists of Messrs. Kayser and Kime, and is responsible for recommending the firm to be appointed as auditors to audit financial statements and to perform services related to the audit; reviewing the scope and results of the audit with the auditors, reviewing with management and the auditors the Companys annual operating results; and considering the adequacy of the internal accounting procedures and the effect of such procedures on the auditors independence. Mr. Kime who chairs this committee is a chartered accountant and provides financial expertise to the Audit Committee. Each Audit Committee member is an independent director of the Company.

Compensation Committee

The Compensation Committee consists of Messrs. Kime and Tenney, and is responsible for evaluating, reviewing and supervising the procedures of the Company with regard to human resources; assessing the performance of the officers of the Company; reviewing annually the remuneration of the officers; and recommending to the Board of Directors general remuneration policies regarding salaries, bonuses and other forms of remuneration for the directors and executive officers of the Company.

Audit Committee Financial Expert

The Board of Directors has determined that Mr. Kime is an audit committee financial expert as defined by Item 401(h) of Regulation S-K of the Exchange and is independent within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.



26



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Compliance with Section 16(a) of the Exchange Act

Section 16(a) of the Exchange Act, requires Stellars executive officers, directors and persons who beneficially own more than 10% of the Common Shares ("reporting persons") to file initial reports of ownership and reports of changes of ownership with the United States Securities and Exchange Commission. Executive officers, directors and greater than 10% beneficial owners are required to furnish Stellar with copies of all Section 16(a) forms they file.

The Company believes that all of its officers and directors have filed reports required by Section 16 (a) of the Exchange Act during 2007.

Code of Ethics

The Company has not adopted a code of ethics in light of its limited number of executive officers.

Item 10.

Executive Compensation.

Summary Compensation Table

The Company does not have a long-term incentive plan or pension plan and has never granted stock appreciation rights to any of its directors, officers or employees.

The following table sets forth all compensation earned during each of the three years included in the period ended December 31, 2007 by the Chief Executive Officer of Stellar, such individual being the only executive officer of Stellar whose total annual salary, bonus and other annual compensation exceeded $100,000 (USD).

|                               |  |      |  |                               |  |                        |  |                            |  |                                    
|------------------------------ |  | ---- |  | ----------------------------- |  | ---------------------- |  | -------------------------- |  | -----------------------------------
|                               |  |      |  | Annual Compensation
($)(Cdn.) |  | Long Term Compensation
|Name of Principal and Position |  | Year |  | Salary                        |  | Bonus                  |  | Other Annual 
Compensation |  | Securities  Underlying 
Options (#)
|                               |  |      |  |                               |  |                        |  |                            |  |                                    
|Peter Riehl                    |  | 2007 |  | 175,000                       |  |                       |  |                           |  |                                   
|President & Chief              |  | 2006 |  | 175,000                       |  |                       |  |                           |  |                                   
|Executive Officer              |  | 2005 |  | 175,000                       |  |                       |  |                           |  | 70,000                             

Employment Agreements and Termination of Employment

Effective as of September 1, 2000, Stellar entered into an employment agreement with Peter Riehl. Under Mr. Riehls employment agreement, Mr. Riehl agreed to serve as a director of Stellar and is employed as the President and Chief Executive Officer of Stellar.

Effective January 1, 2007, Mr. Riehls employment agreement provides for a gross annual remuneration of $175,000, plus standard dental and life insurance benefits. Mr. Riehl is also entitled to be reimbursed for all Company-related travel and other out-of-pocket expenses. Pursuant to his employment agreement, Mr. Riehl is further entitled to receive an annual bonus, at the discretion of the Board of Directors, in the form of cash and/or stock options, based upon the achievement of certain performance goals to be established by the Compensation Committee of the Board of Directors. The employment agreement is automatically renewable for successive one year terms unless and until notice of intent to terminate is given by either Mr. Riehl or Stellar at least three months prior to the expiration of the term. Notwithstanding the foregoing, in the event that Mr. Riehls employment is terminated, other than for cause, by the Company, Mr. Riehl is entitled to a lump sum payment equal to 200% of his then current base salary. In the event of any such termination, any unvested stock options held by the Mr. Riehl will immediately vest.  Mr. Riehl has agreed to not compete with the Company for a period of two years from the date of the termination of his employment, irrespective of the cause of such termination.

Stock Option Plan

The Company has established a stock option plan for the directors, executive officers, employees and consultants of the Company and any subsidiaries of the Company that may be formed (the Plan) in order to attract and retain competent persons motivated to work toward ensuring the Companys success and to encourage such persons to acquire Common Shares. Individuals who are eligible to be selected to receive options under the Plan are directors, executive officers, employees and consultants of the Company and subsidiaries of the Company. The Board of Directors administers the Plan and has the power to amend, modify, suspend or terminate the Plan, subject to any necessary regulatory approvals.



27



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All of the options granted under the Plan may be exercised within a maximum period of three and one-half years following the date of grant thereof. Subject to the Plan, the Board of Directors designates the recipients of options and determines the number of Common Shares covered by each option, the date of vesting of each option, the exercise price of each option, the expiry date and any other terms relating thereto, in each case, in accordance with applicable legislation and the rules and policies of the applicable securities regulatory authorities. The price at which the Common Shares may be purchased pursuant to the Plan may not be lower than the closing price of the Common Shares on the principal stock exchange where the Common Shares are listed on the date of grant. On June 29, 2005, the Company increased the number of options in the plan to 4,629,452 from 4,157,841; the maximum number of Common Shares that were issuable under the Plan may not exceed 4,629,452. The maximum number of Common Shares that may be granted to any person may not exceed 5% of the outstanding Common Shares.

As at the date of this report the number of Common Shares which remain available for issuance under the Plan is 1,054,452 of which 1,699,452 Common Shares remain available for option grants.

The Plan has been approved by the Companys shareholders.

Option Grants in Last Fiscal Year

There were no options to purchase Common Shares granted to Mr. Riehl during the fiscal year ended December 31, 2007 (2006  0).

Compensation of Directors

In 2007, the directors of the Company were entitled to receive cash compensation for serving in such capacity. The director acting as Chairman of the Board receives $10,000 annually. All other directors receive $6,000 annually. In addition, members of the Audit Committee receive $4,000 annually and members of the Compensation Committee receive $1,000 annually. Board members are eligible to participate in the Plan.

No options to purchase Common Shares were granted to the directors and officers under the Option Plan in 2007.

Aggregated Option Exercises and Fiscal Year-End Option Value Table

The following table sets forth information concerning each exercise of options by Mr. Riehl during the year ended December 31, 2007.

|            |  |                                       |  |                            |  |                                              |  |                                                                           
|----------- |  | ------------------------------------- |  | -------------------------- |  | -------------------------------------------- |  | --------------------------------------------------------------------------
|            |  | Securities 
Acquired on 
Exercise (#) |  | Value 
Realized ($)
(Cdn.) |  | Unexercised Options at
December 31, 2007 (#) |  | Value of Unexercised
In-the-Money Options at
December 31, 2007 
($) (Cdn.)
|Name        |  |                                       |  |                            |  | Exercisable/
Unexercisable                   |  | Exercisable/
Unexercisable                                                
|            |  |                                       |  |                            |  |                                              |  |                                                                           
|Peter Riehl |  |                                      |  |                           |  | 70,000                                       |  | $0 / - $0 -                                                               

Indemnification of Directors

The Company has agreed to indemnify each of its directors to the fullest extent permitted by Ontario, Canada corporate law for all costs, liabilities and expenses incurred by each director, including legal fees, in respect of claims to which a director is made a party by reason of being or having been a director of the Company or any subsidiary thereof, provided such director acted honestly and in good faith with a view to the best interests of the Company and, in the case of a criminal or administrative proceeding enforced by monetary penalty, such director had reasonable grounds for believing that his conduct was lawful.

Directors and Officers Liability Insurance

The Company maintains insurance for the benefit of its directors and officers against liability in their respective capacities as directors and officers. The annual premium payable by the Company in respect of such insurance is $26,460 for 2007 compared to $30,780 in 2006. The total amount of insurance purchased for the directors and officers as a group in 2007 and 2006 is $2,000,000. The directors and officers are not required to pay any premium in respect of the insurance. The insurance policy does not contain deductibility provisions.



28



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Item 11.

Security Ownership of Certain Beneficial Owners and Management.

The following table sets forth, as at March 30, 2008, certain information as to (i) each person, who to the knowledge of the Company, is the beneficial owner of more than five percent (5%) of any class of the Companys voting securities and (ii) each class of equity securities of the Company or any of its subsidiaries (other than directors qualifying shares) beneficially owned by (A) each director of the Company and the Chief Executive Officer and (B) all directors and executive officers of the Company as a group.

|               |  |                                                                        |  |                                            |     |                  |  
|-------------- |  | ---------------------------------------------------------------------- |  | ------------------------------------------ | --- | ---------------- | -
|Title of Class |  | Name and Address of
Beneficial Owner                                   |  | Amount and
Nature of 
Beneficial Ownership |     | Percent of
Class |  
|               |  |                                                                        |  |                                            |     |                  |  
|Common Shares  |  | Peter Riehl
14 Exmoor Pl.
London, Ontario
Canada N5X 3W2               |  | 3,544,741                                  | (1) | 14.9             | %
|Common Shares  |  | Arnold Tenney
31 Maple Avenue
Toronto, Ontario
Canada M4W 2T8          |  | 954,200                                    | (2) | 4.0              | %
|Common Shares  |  | Robert H. Kayser
156 McGarrel Drive
London, Ontario
Canada N6G 5E7     |  | 50,000                                     | (3) | 0.2              | %
|Common Shares  |  | John Kime
136 Hunt Club Drive
London, Ontario
Canada N6H 3Y7           |  | 175,000                                    | (4) | 0.7              | %
|Common Shares  |  | Janice Clarke
8664 Parkhouse Drive
Mt. Brydges, Ontario
Canada N0L 1W0 |  | 82,222                                     | (5) | 0.4              | %
|Common Shares  |  | John Gregory
340 Edgemont Ave
Suite 500
Bristol, Tennessee
U.S.A 37620 |  | 5,188,794                                  | (6) | 21.8             | %
|Common Shares  |  | All directors and executive officers
(6 individuals)                   |  | 5,281,086                                  | (7) | 42.2             | %



(1)

Includes (i) 1,690,714 Common Shares owned by Mr. Riehls wife and (ii) currently exercisable options 70,000 Common Shares granted under the Plan - See Item 10. Executive Compensation.  Stock Option Plan. Peter Riehl, and his spouse entered into an agreement with SJ Strategic Investments, LLC ("SJ") to which they have granted rights of first refusal to SJ in respect of the sale of securities in Stellar owned by them.

(2)

Includes (i) 672,700 Common Shares owned by LMT Financial Inc, a company beneficially owned by Mr. Tenney and his spouse; (ii) 126,500 Common Shares owned by Arnmart Investments Limited, a company in which Mr. Tenney holds and equity interest; (iii) 85,000 Common Shares owned by Mr. Tenneys spouse; (iv) currently exercisable options on 70,000 Common Shares granted under the Plan. See Item 10. Executive Compensation.  Stock Option Plan,



29



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(3)

Includes (i) currently exercisable options on 50,000 Common Shares granted under the Plan. See Item 10. Executive Compensation.  Stock Option Plan,

(4)

Includes (i) currently exercisable options on 50,000 Common Shares granted under the Plan. See Item 10. Executive Compensation.  Stock Option Plan,

(5)

Includes (i) 10,000 Common Shares owned by Ms. Clarkes spouse and (ii)currently exercisable options on 10,000 Common Shares granted under the Plan. See Item 10. Executive Compensation.  Stock Option Plan.

(6)

Shares are directly owned by SJ Strategic Investments, LLC, with John M. Gregory as the managing member deemed to have sole voting and dispositive power over the shares. Joan P. Gregory, Susan Gregory and James M. Gregory are deemed to be indirect beneficial owners of shares due to their financial interest in SJ. SJ has ther right of first refusal over shares owned by Peter Riehl and his spouse. See 12 (1) above.

(7)

Includes currently exercisable options on 250,000 Common Shares granted under the Plan. See Item 10. Executive Compensation.  Stock Option Plan.

Item 12.

Certain Relationships and Related Transactions.

In January 2006, Stellar entered into a consulting agreement with LMT Financial Inc., a company beneficially owned by a director and his spouse. This consulting agreement was extended for 2007. Mr. Tenney currently serves as Chairman of the Board of Stellar. In consideration for services provided under this agreement, LMT Financial Inc. earned a fee of $72,000 (Cdn.) in 2007. This fee was satisfied in full through 12 monthly payments of $6,000 during 2007.

Item 13.

Exhibits and Reports on Form 8-K.

(a)

Exhibits

|            |  |                                                                                                                   |  |                       
|----------- |  | ----------------------------------------------------------------------------------------------------------------- |  | ----------------------
|Exhibit
No. |  | Description of Exhibit                                                                                            |  | Sequential
Page
Number
|            |  |                                                                                                                   |  |                       
|2.1         |  | Articles of Incorporation of the Company                                                                          |  | *                     
|2.2         |  | First Articles of Amendment                                                                                       |  | *                     
|2.3         |  | Second Articles of Amendment                                                                                      |  | *                     
|2.4         |  | By-Laws of the Company                                                                                            |  | *                     
|3.1         |  | Specimen Form of Common Share Certificate                                                                         |  | **                    
|10.1        |  | United States Patent No. 6,083,933                                                                                |  | *                     
|10.2        |  | Canadian Patent No. 2,269,260                                                                                     |  | *                     
|10.3        |  | License Agreement dated December 21, 2001 between the Company and G. Pohl-Boskamp GmbH & Co.                      |  | *                     
|10.4        |  | Consulting agreement dated February 21, 2001 between the Company and LMT Financial Inc.                           |  | *                     
|10.5        |  | Contract Services Agreement Inc. dated October 10, 2003 between the Company and Dalton Chemical Laboratories Inc. |  | **                    
|10.6        |  | Amended Agreement dated January 1, 2004 between the Company and LMT Financial Inc.                                |  | ***                   
|10.7        |  | NeoVisc Licence and Supply Agreements dated March 24, 2004 between the Company and SJ Pharmaceuticals Inc.        |  | ***                   
|10.8        |  | Uracyst Licence and Supply Agreements dated March 24, 2004 the Company and SJ Pharmaceuticals Inc                 |  | ***                   
|10.9        |  | Amending Consulting Agreement dated December 10, 2004 between the Company & LMT Financial Inc.                    |  | ***                   
|10.10       |  | Option Plan                                                                                                       |  | ***                   
|10.11       |  | Amendment to Option Plan  2001                                                                                   |  | ***                   
|10.12       |  | Amendment to Option Plan  2004                                                                                   |  | ***                   
|10.13       |  | Amendment to Option Plan  2005                                                                                   |  | ***                   
|10.14       |  | Uracyst Licence and Supply Agreements dated December 13, 2006 the Company and Watson Pharma, Inc.                 |  | *****                 
|31.1        |  | Certification of Chief Executive Officer                                                                          |  | ****                  
|31.2        |  | Certification of Chief Financial Officer                                                                          |  | ****                  
|32.1        |  | Certification of Chief Executive Officer                                                                          |  | ****                  
|32.2        |  | Certification of Chief Financial Officer                                                                          |  | ****                  



30



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| |  |  |  | 
| |  |  |  | 



*

Filed as an exhibit to Amendment No. 1 to the Companys Registration Statement on Form 10-SB dated February 4, 2002.

**

Filed as an exhibit to Amendment No. 2 to the Companys Registration Statement on Form 10-SB dated April 26, 2003.

***

Filed as an exhibit to Amendment No. 2 to the Companys Registration Statement on Form 10-SB dated January 13, 2006

****

Filed as an exhibit Companys 2006 Annual Report Form 10-KSB dated March 30, 2007.

*****

Filed on December 28, 2006 on Form 8-K

(b)

Reports on Form 8-K

Filed May 15, 2007  1st Qtr 2007 Financial Results

Filed August 14, 2007  2nd Qtr 2007 Financial Results

Filed November 14, 2007  3rd Qtr 2007 Financial Results

Item 14.

Principal Accountant Fees and Services.

Fees for Services Provided by Independent Auditors

Fees for all services provided by the Companys independent auditors, for 2007 and 2006 were as follows:

Audit Fees.

Fees for services for fiscal years 2007 related to the annual financial statement audits and reviews of quarterly financial statements filed in the reports on Form 10-QSB and statutory audits were approximately $105,230, compared to $93,550 in 2006.

Audit-Related Fees.

In 2007, the Company did not have any expenses in regards to other audit related fees. In 2006, the company paid Kraft, Berger, Grill, Swartz & Cohen LLP approximately $2,910 for tax advice services.

Tax Fees.

Collins Barrows, accounting firm in London, Ontario (a company previously affiliated with Mintz & Partners, LLP) will be filing the Companys taxes for 2006, it is estimated that fees related to the 2007 and 2006 tax filings will be approximately $3,500 for each year filed. In addition, Collins Barrows provided services with regards to employee benefit issues and research & development credits, such fees for 2007 were $13,249 compared to $1,250 in 2006.

All Other Fees.

The Company generally does not engage its auditors for "other" services.

Pre-Approval Policy for Services of Independent Auditors

As part of its duties, the Audit Committee is required to pre-approve audit and non-audit services preformed by the independent auditors in order to assure that the provision of such services does not impair the auditors independence. On an annual basis, the Audit Committee will review and provide pre-approval for certain types of services that may be provide by the independent auditors without obtaining specific approval from the Audit Committee. If a type of service to be provided by the independent auditors has not received pre-approval during this annual process, it will require specific pre-approval form the Audit Committee. The Audit Committee does not delegate to management its responsibilities to pre-approve services performed by the independent auditors.

The Audit Committee of the board has recommended that Deloitte & Touche, LLP be appointed as the companys independent auditors for the fiscal year ending December 31, 2008.



31



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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|                     |                               |                 
|-------------------- | ----------------------------- | ----------------
|Date: March 31, 2008 | Stellar Pharmaceuticals Inc. 
|                     |                               |                 
|                     | By:                           | /s/ARNOLD TENNEY
|                     | Name: Arnold Tenney          
|                     | Title:  Chairman of the Board

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

|                     |                               |                 
|-------------------- | ----------------------------- | ----------------
|                     |                              
|                     |                               |                 
|Date: March 31, 2008 | By:                           | /s/ARNOLD TENNEY
|                     | Name: Arnold Tenney          
|                     | Title:  Chairman of the Board



|                     |                                 |               
|-------------------- | ------------------------------- | --------------
|                     |                                
|                     |                                 |               
|Date: March 31, 2008 | By:                             | /s/PETER RIEHL
|                     | Name: Peter Riehl              
|                     | Title:  Chief Executive Officer



|                     |                                |                    
|-------------------- | ------------------------------ | -------------------
|                     |                               
|                     |                                |                    
|Date: March 31, 2008 | By:                            | /s/ROBERT H. KAYSER
|                     | Name: Robert H. Kayser        
|                     | Title:  Secretary and Director



|                     |                    |                
|-------------------- | ------------------ | ---------------
|                     |                   
|                     |                    |                
|Date: March 31, 2008 | By:                | /s/JOHN J. KIME
|                     | Name: John J. Kime
|                     | Title:  Director  



|                     |                       |                  
|-------------------- | --------------------- | -----------------
|                     |                      
|                     |                       |                  
|Date: March 31, 2008 | By:                   | /s/JOHNM. GREGORY
|                     | Name: John M. Gregory
|                     | Title:  Director     



|                     |                                 |                    
|-------------------- | ------------------------------- | -------------------
|                     |                                
|                     |                                 |                    
|Date: March 31, 2008 | By:                             | /s/JANICE M. CLARKE
|                     | Name: Janice M. Clarke         
|                     | Title:  Chief Financial Officer



32



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STELLAR PHARMACEUTICALS INC.







FINANCIAL STATEMENTS



(Expressed in Canadian dollars)





DECEMBER 31, 2007 AND 2006







---





STELLAR PHARMACEUTICALS INC.







DECEMBER 31, 2007



(Expressed in Canadian dollars)





CONTENTS

|                                                         |       
|-------------------------------------------------------- | ------
|                                                         | PAGE  
|FINANCIAL STATEMENTS                                     |       
|REPORT BY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS   | F-1   
|BALANCE SHEETS                                           | F-2   
|STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY            | F-3   
|STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) | F-4   
|STATEMENTS OF CASH FLOWS                                 | F-5   
|NOTES TO FINANCIAL STATEMENTS                            | F-6-22









---





Deloitte







Report of Independent Registered Chartered Accountants



To the Board of Directors and Shareholders of

Stellar Pharmaceuticals Inc.



We have audited the accompanying balance sheet of Stellar Pharmaceuticals Inc. (the Company) as at December 31, 2007, and the related statements of operations and comprehensive loss, shareholders equity, and cash flows 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 the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 provide a reasonable basis for our opinion.



In our opinion, these financial statements, present fairly, in all material respects, the financial position of the Company as at December 31, 2007, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.



The financial statements as at December 31, 2006 and for the year then ended were audited by Mintz & Partners LLP who expressed an opinion without reservation on those statements in their report dated March 26, 2007.





/s/ Deloitte & Touche LLP



Independent Registered Chartered Accountants

Licensed Public Accountants

Toronto, Canada

March 30, 2008











F-1



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STELLAR PHARMACEUTICALS INC.

BALANCE SHEETS

(Expressed in Canadian dollars)

December 31



|                                        |                                                          |                                                    |                                    |             |           |           |             |          
|--------------------------------------- | -------------------------------------------------------- | -------------------------------------------------- | ---------------------------------- | ----------- | --------- | --------- | ----------- | ---------
|ASSETS                                  |                                                          | 2007                                               |                                    |             | 2006     
|CURRENT                                 |                                                          |                                                    |                                    |             |           |           |            
|                                        | Cash and cash equivalents (Note 3)                       | $                                                  | 3,211,126                          |             | $         | 3,515,193
|                                        | Accounts receivable, net of allowance $nil (2006 - $nil) |                                                    | 272,341                            |             |           | 199,704  
|                                        | Inventories (Note 4)                                     |                                                    | 305,040                            |             |           | 274,597  
|                                        | Taxes recoverable                                        |                                                    | 164,714                            |             |           | -        
|                                        | Prepaids, deposits and sundry receivables (Note 5)       |                                                    | 44,066                             |             |           | 55,407   
|                                        |                                                          |                                                    |                                    |             | 3,997,287 |           |             | 4,044,901
|PROPERTY, PLANT AND EQUIPMENT(Note 6)   |                                                          | 822,692                                            |                                    |             | 853,818  
|OTHER ASSETS(Note 7)                    |                                                          | 55,430                                             |                                    |             | 49,691   
|LOAN RECEIVABLE(Note 8)                 |                                                          | 14,822                                             |                                    |             | -        
|                                        |                                                          |                                                    |                                    | $           | 4,890,231 |           | $           | 4,948,410
|LIABILITIES                             |                                                          |                                                    |                                    |             |          
|CURRENT                                 |                                                          |                                                    |                                    |             |           |           |            
|                                        | Accounts payable                                         | $                                                  | 214,442                            |             | $         | 226,026  
|                                        | Accrued liabilities                                      |                                                    | 192,364                            |             |           | 135,198  
|                                        | Deferred revenues                                        |                                                    | 10,573                             |             |           | 1,500    
|                                        |                                                          |                                                    |                                    |             | 417,379   |           |             | 362,724  
|CONTINGENCIES AND COMMITMENTS (Note 15) |                                                          |                                                    |                                    |             |          
|                                        |                                                          |                                                    |                                    |             |          
|SHAREHOLDERS EQUITY                    |                                                          |                                                    |                                    |             |          
|CAPITAL STOCK                           |                                                          |                                                    |                                    |             |          
|                                        | AUTHORIZED                                               |                                                    |                                    |             |           |           |            
|                                        | Unlimited                                                | Non-voting, convertible redeemable and retractable |                                    |             |           |           |            
|                                        |                                                          |                                                    | preferred shares with no par value |             |           |           |             |          
|                                        | Unlimited                                                | Common shares with no par value                    |                                    |             |           |           |            
|                                        |                                                          |                                                    |                                    |             |           |           |             |          
|                                        | ISSUED (Note 9)                                          |                                                    |                                    |             |           |          
|                                        | 23,822,540                                               | Common shares (2006  23,819,040)                  |                                    | 8,303,054   |           |           | 8,299,554  
|                                        |                                                          | Paid-in capital options - outstanding              |                                    | 123,002     |           |           | 513,990    
|                                        |                                                          |                                                    | - expired                          |             | 623,417   |           |             | 201,322  
|                                        |                                                          |                                                    |                                    |             | 9,049,473 |           |             | 9,014,866
|DEFICIT                                 |                                                          |                                                    |                                    | (4,576,621) |           |           | (4,429,180)
|                                        |                                                          |                                                    |                                    |             | 4,472,852 |           |             | 4,585,686
|                                        |                                                          |                                                    |                                    | $           | 4,890,231 |           | $           | 4,948,410



|                                               
|-----------------------------------------------
|See accompanying notes to financial statements.
|                                               
|Approved on behalf of the Board:               
|/s/ Peter Riehl

/s/Arnold Tenney              
|Director
Director                              



F-2



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STELLAR PHARMACEUTICALS INC.

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

(Expressed in Canadian dollars)

FOR THE YEARS ENDED DECEMBER 31, 2007 AND 2006

|                              |            |           |                 |         |            
|----------------------------- | ---------- | --------- | --------------- | ------- | -----------
|                              |            |           |                 |        
|                              |            |           |                 |         |            
|                              |            |           |                 |         |            
|                              | Number of  |           | Paid in Capital
|                              | Common     | Common    | Options         | Options |            
|                              | Shares     | Shares    | Outstanding     | Expired | Deficit    
|                              | #          | $         | $               | $       | $          
|BALANCE,                      |            |           |                 |         |            
|January 1, 2006               | 23,470,190 | 8,100,253 | 545,025         | 98,913  | (5,684,405)
|Shares issued for services    | 2,500      | 2,275     | -               | -       | -          
|Options issued to consultants | -          | -         | 34,534          | -       | -          
|Options exercised             | 346,350    | 197,026   | (40,863)        | -       | -          
|Options issued to employees   | -          | -         | 77,703          | -       | -          
|Employees options expired     | -          | -         | (6,561)         | 6,561   | -          
|Consultants options expired   | -          | -         | (95,848)        | 95,848  | -          
|Net income for the year       | -          | -         | -               | -       | 1,255,225  
|BALANCE,                      |            |           |                 |         |            
|December 31, 2006             | 23,819,040 | 8,299,554 | 513,990         | 201,322 | (4,429,180)
|Shares issued for services    | 3,500      | 3,500     | -               | -       | -          
|Options issued to employees   | -          | -         | 31,107          | -       | -          
|Employees options expired     | -          | -         | (253,419)       | 253,419 | -          
|Consultants options expired   | -          | -         | (168,676)       | 168,676 | -          
|Net loss for the year         | -          | -         | -               | -       | (147,441)  
|BALANCE,                      |            |           |                 |         |            
|December 31, 2007             | 23,822,540 | 8,303,054 | 123,002         | 623,417 | (4,576,621)



See accompanying notes to financial statements.



F-3



---







STELLAR PHARMACEUTICALS INC.

STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Expressed in Canadian dollars)

FOR THE YEARS ENDED DECEMBER 31

|                                                                                                                                  |   |            |  |   |           
|--------------------------------------------------------------------------------------------------------------------------------- | - | ---------- |  | - | ----------
|                                                                                                                                  |   | 2007       |  |   | 2006      
|PRODUCT SALES(Note 10)                                                                                                            | $ | 1,664,595  |  | $ | 1,427,264 
|COST OF PRODUCTS SOLD(excluding amortization of $93,634
(2006- $107,537) and other items shown below of $20,145 (2006 - $30,496)) |   | 405,512    |  |   | 419,652   
|MARGIN ON PRODUCTS SOLD                                                                                                           |   | 1,259,083  |  |   | 1,007,612 
|ROYALTIES & LICENSING REVENUE(Note 10)                                                                                            |   | 582,670    |  |   | 2,950,433 
|WRITE-DOWN OF OBSOLETE INVENTORY                                                                                                  |   | (20,145)   |  |   | (7,291)   
|OTHER PRODUCT COST(Note 11)                                                                                                       |   | -          |  |   | (29,205)  
|GROSS PROFIT                                                                                                                      |   | 1,821,608  |  |   | 3,921,549 
|EXPENSES                                                                                                                          |   |            |  |   |           
|Selling, general and administrative (Note 16)                                                                                     |   | 2,090,517  |  |   | 2,332,452 
|Research and development (Note 2 (l))                                                                                             |   | (55,268)   |  |   | 217,607   
|Amortization                                                                                                                      |   | 146,847    |  |   | 159,117   
|                                                                                                                                  |   | 2,182,096  |  |   | 2,709,176 
|INCOME (LOSS) FROM OPERATIONS                                                                                                     |   | (360,488)  |  |   | 1,212,373 
|INTEREST AND OTHER INCOME (Note 15(b))                                                                                            |   | 213,047    |  |   | 42,852    
|NET INCOME (LOSS) BEFORE INCOME TAXES                                                                                             |   | (147,441)  |  |   | 1,255,225 
|INCOME TAXES(Note 12)                                                                                                             |   | -          |  |   | -         
|NET INCOME (LOSS)  AND COMPREHENSIVE INCOME (LOSS)                                                                                | $ | (147,441)  |  | $ | 1,255,225 
|EARNINGS (LOSS) PER SHARE(Note 13)    - Basic                                                                                     | $ | (0.01)     |  | $ | 0.05      
|- Diluted                                                                                                                         | $ | -          |  | $ | 0.05      
|WEIGHTED AVERAGE NUMBER OF COMMON                                                                                                 |   |            |  |   |           
|SHARES  OUTSTANDING- Basic                                                                                                        |   | 23,821,562 |  |   | 23,575,479
|- Diluted                                                                                                                         |   | 23,821,562 |  |   | 23,634,070
|                                                                                                                                  |   |            |  |   |           
|See accompanying notes to financial statements.                                                                                  



F-4



---





STELLAR PHARMACEUTICALS INC.

STATEMENTS OF CASH FLOWS

(Expressed in Canadian dollars)

FOR THE YEARS ENDED DECEMBER 31



|                                                              |                                                      |           |           |      |           |           |     
|------------------------------------------------------------- | ---------------------------------------------------- | --------- | --------- | ---- | --------- | --------- | ----
|                                                              |                                                      |           |           | 2007 |           |           | 2006
|CASH FLOWS FROM OPERATING ACTIVITIES                          |                                                      |           |           |      |          
|                                                              | Net income (loss)                                    | $         | (147,441) |      | $         | 1,255,225
|                                                              | Items not affecting cash                             |           |           |      |           |          
|                                                              | Amortization                                         |           | 146,847   |      |           | 159,117  
|                                                              | Unrealized foreign exchange (gain) loss              |           | 849       |      |           | -        
|                                                              | Issuance of equity instruments for services rendered |           | 34,607    |      |           | 114,512  
|Change in non-cash operating assets and liabilities (Note 14) |                                                      | (202,643) |           |      | (222,139)
|CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES         |                                                      | (167,781) |           |      | 1,306,715
|                                                              |                                                      |           |           |      |          
|CASH FLOWS FROM INVESTING ACTIVITIES                          |                                                      |           |           |      |          
|                                                              | Additions to property, plant and equipment           |           | (114,369) |      |           | (51,581) 
|                                                              | Increase in other assets                             |           | (7,095)   |      |           | (4,859)  
|                                                              | Loan receivable                                      |           | (14,822)  |      |           | -        
|CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES         |                                                      | (136,286) |           |      | (56,440) 
|CASH FLOWS FROM FINANCING ACTIVITIES                          |                                                      |           |           |      |          
|                                                              | Issuance of common stock                             |           | -         |      |           | 156,163  
|CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES         |                                                      | -         |           |      | 156,163  
|EFFECT OF EXCHANGE RATES ON CASH HELD IN
FOREIGN CURRENCY     |                                                      | (16,575)  |           |      | 91       
|CHANGE IN CASH AND CASH EQUIVALENTS                           |                                                      | (287,492) |           |      | 1,406,347
|CASH AND CASH EQUIVALENTS, beginning of year                  |                                                      | 3,515,193 |           |      | 2,108,755
|CASH AND CASH EQUIVALENTS, end of year                        | $                                                    | 3,211,126 |           | $    | 3,515,193



See accompanying notes to financial statements.





F-5



---







STELLAR PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS

(Expressed in Canadian dollars)

DECEMBER 31, 2007 AND 2006

1.

DESCRIPTION OF BUSINESS

Stellar Pharmaceuticals 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 markets its products in Canada and currently has agreements in place for distribution of its products in various countries including the United States of America.

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.



(a)

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash and all highly liquid investments purchased with an original maturity of three months or less at the date of purchase or are otherwise highly liquid.  Cash and cash equivalents are held with two major financial institutions located in Canada and one financial institution located in Dublin, Ireland.

(b)

ACCOUNTS RECEIVABLE

The Company routinely assesses the recoverability of all material trade and other receivables to determine their collectibility by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer's ability to pay.

(c)

REVENUE RECOGNITION

Revenue is recognized in accordance with Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition of Financial Statements" and EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables." The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable, and collection is reasonably.  License fees which are comprised of initial fees and milestone payments are recognized upon achievement of the milestones and provided that collectibility is reasonably assured and other revenue recognition criteria are met.   Revenue from the sale of products, net of trade discounts and allowances, is 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 the sale of its goods.

Revenues associated with multiple-element arrangements are attributed to the various elements, if certain criteria are met, including whether the delivered element has stand alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered elements. Non-refundable up-front fees for the transfer of methods and technical know-how, not requiring the Company to perform additional research or development activities or other significant future performance obligations, are recognized at the time the agreement is executed.  Milestone payments are recognized into income upon the achievement of the specified milestones when the Company has no further involvement or obligation to perform services, as related to that specific element of the arrangement. Up-front fees and other amounts received in excess of revenue recognized are recorded as deferred income.

Royalty revenue is recognized when the Company has fulfilled the terms in accordance with the contractual agreement and has no future obligation, the amount of the royalty fee is determinable and collection is reasonably assured.





F-6



---







STELLAR PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS

(Expressed in Canadian dollars)

DECEMBER 31, 2007 AND 2006

(d)

INVENTORIES

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

(e)

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 lives of the assets.  The Company periodically compares the carrying values 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
|Building                      |  | 20 years   
|Computer and office equipment |  | 5 years    
|Manufacturing equipment       |  | 5 years    
|Warehouse equipment           |  | 10 years   

(f)

OTHER ASSETS

Amortization of other assets is being provided for on a 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 the remaining net book value to expenses.

(g)

USE OF ESTIMATES

The preparation of these financial statements has required management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent liabilities as at December 31, 2007 and 2006, and the revenue and expenses recorded for the years then ended.   On an ongoing basis, the Company evaluates its estimates, including those related to provision for doubtful accounts, accrued liabilities, income taxes, stock based compensation, revenue recognition and intangible assets.  The Company basis its estimates on historical experiences and on various other assumptions believed to be reasonable under the circumstances.  Actual results could defer from those estimates.  As adjustments become necessary, they are reported in earnings in the period in which they become known.

(h)

DEFERRED INCOME TAXES

The Company accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements.  Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax results on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.





F-7



---







STELLAR PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS

(Expressed in Canadian dollars)

DECEMBER 31, 2007 AND 2006

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The Company records net deferred tax assets to the extent we believe these assets will more likely than not be realized.  In making such determination, all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations.  In the event a determination was made that the Company would be able to realize deferred income tax assets in the future in excess of the net recorded amount, an adjustment to the valuation allowance would be made, which would reduce the provision for income taxes.

In July 2006, the FASB issued Financial Interpretation ("FIN") No. 48, Accounting for Uncertainty in Income Taxes, which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, Accounting for Income Taxes.  FIN No. 48 provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.  Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods.  This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective for fiscal periods beginning after December 15, 2006.

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007 with no material impact to our financial statements.

(i)

STOCK-BASED COMPENSATION

The Company uses fair value based method of accounting for all its stock-based compensation in accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 123(R).  The estimated fair value of the options that are ultimately expected to vest based on performance related conditions, as well as the options that are expected to vest based on future service, is recorded over the options vesting period and charged to stock-based compensation.  In determining the amount of options that are expected to vest, the Company takes into account, voluntary termination behaviour, as well as, trends of actual option forfeitures.    Total compensation cost under SFAS No. 123(R) for the stock plans for the years ended December 31, 2007 and 2006 was $31,107 and $112,237, respectively.

(j)

FOREIGN CURRENCY TRANSACTIONS

Foreign currency transactions are recorded using the average monthly rate, which is a proxy for the exchange rate in effect on the date of the transactions.

(k)

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.





F-8



---







STELLAR PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS

(Expressed in Canadian dollars)

DECEMBER 31, 2007 AND 2006

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(l)

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.  The approved refundable portion of the tax credits are netted against the related expenses.  Non refundable investment tax credits are recorded in the period when reasonable assurance exists that the Company has complied with the terms and conditions required for approval of the tax credit and it is more likely than not that the Company will realize the benefits of these tax credits against the deferred taxes.  Refundable investment tax credits are recorded in the period when reasonable assurance exists that the Company has complied with the terms and conditions required for approval of the tax credit and it is more likely than not that the Company will collect it.  The Company has recorded an offset of $158,022 to research and development for prior years tax credits, which has now been assessed and approved.

(m)

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.

(n)

EARNINGS (LOSS) PER SHARE

SFAS No. 128, Earnings Per Share, requires dual presentation of basic and diluted earnings per share (EPS) with a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution; diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue shares were exercised or converted into shares that would then share in the earnings.

Basic earnings (loss) per share are computed based on the weighted average number of member shares outstanding each year. Stock options and warrants are not considered in the calculation, as the impact of the potential dilution (355,000 shares at December 31, 2007, and 1,010,000 shares at December 31, 2006) would be a decrease to the basic loss per share. Therefore, diluted loss per share is not presented when the effect is anti-dilutive.

(o)

RECENT ACCOUNTING PRONOUNCEMENTS

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

In September 2006, the FASB issued SFAS No. 157, " Fair Value Measures" (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value.  SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.  The Company is currently evaluating the impact that the adoption of SFAS No. 157 will have on our future financial statements.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS No. 159).  SFAS No. 159 permits companies to choose to ensure certain financial instruments and certain other items at fair value.  The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings.  SFAS No. 159 is effective for the company beginning in the first quarter of year 2008, although earlier adoption is permitted.  The Company is currently evaluating the impact that the SFAS No. 159 will have on its financial statements.



F-9



---





STELLAR PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS

(Expressed in Canadian dollars)

DECEMBER 31, 2007 AND 2006

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In December 2007, the FASB issued SFAS No. 160, Non controlling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51. SFAS No. 160 establishes new accounting and reporting standards for the non controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a non controlling interest (minority interest) as equity in the consolidated financial statements and separate from the parents equity. The amount of net income attributable to the non controlling interest will be included in consolidated net income on the face of the income statement. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its non controlling interest. SFAS No. 160 is effective for fiscal years, and interim periods beginning after January 1, 2009. The Company is currently evaluating the impact that the SFAS No. 160 will have on its financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133 (FAS 161). FAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. The guidance in FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company is currently assessing the impact of FAS 161.

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations. SFAS No. 141(R) will significantly change the accounting for business combinations. Under SFAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. It also amends the accounting treatment for certain specific items including acquisition costs and non controlling minority interests and includes a substantial number of new disclosure requirements. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after January 1, 2009. The Company is currently evaluating the impact that the SFAS No. 141(R) will have on its financial statements.

3.

CASH AND CASH EQUIVALENTS

|                       |              |           |      |   |          
|---------------------- | ------------ | --------- | ---- | - | ---------
|Consists of -          | December 31,
|                       | 2007         |           | 2006
|Cash                   | $            | 579,906   |      | $ | 659,880  
|Short-term investments |              | 2,631,220 |      |   | 2,855,313
|                       | $            | 3,211,126 |      | $ | 3,515,193

4.

INVENTORIES

|                    |              |         |      |   |        
|------------------- | ------------ | ------- | ---- | - | -------
|Consists of -       | December 31,
|                    | 2007         |         | 2006
|Raw material        | $            | 111,752 |      | $ | 85,262 
|Finished goods      |              | 17,652  |      |   | 64,088 
|Packaging materials |              | 39,356  |      |   | 46,386 
|Work in process     |              | 136,280 |      |   | 78,861 
|                    | $            | 305,040 |      | $ | 274,597







F-10



---







STELLAR PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS

(Expressed in Canadian dollars)

DECEMBER 31, 2007 AND 2006

5.

PREPAIDS, DEPOSITS AND SUNDRY RECEIVABLES

|                                   |              |        |      |   |       
|---------------------------------- | ------------ | ------ | ---- | - | ------
|Consists of -                      | December 31,
|                                   | 2007         |        | 2006
|Prepaid operating expenses         | $            | 18,425 |      | $ | 31,686
|Deposit on manufactured goods      |              | 14,065 |      |   | 17,000
|Interest receivable on investments |              | 11,576 |      |   | 6,721 
|                                   | $            | 44,066 |      | $ | 55,407

6.

PROPERTY, PLANT AND EQUIPMENT

|                        |                   |           |                          |   |                     |  |   |        
|----------------------- | ----------------- | --------- | ------------------------ | - | ------------------- |  | - | -------
|Consists of -           | December 31, 2007
|                        | Cost              |           | Accumulated
Amortization |   | Net Carrying
Amount
|Land                    | $                 | 90,000    |                          | $ | -                   |  | $ | 90,000 
|Building                |                   | 586,954   |                          |   | 86,757              |  |   | 500,197
|Office equipment        |                   | 40,495    |                          |   | 33,115              |  |   | 7,380  
|Manufacturing equipment |                   | 620,826   |                          |   | 469,060             |  |   | 151,766
|Warehouse equipment     |                   | 27,608    |                          |   | 1,216               |  |   | 26,392 
|Computer equipment      |                   | 116,735   |                          |   | 69,778              |  |   | 46,957 
|                        | $                 | 1,482,618 |                          | $ | 659,926             |  | $ | 822,692





|                        |                   |           |                          |   |                     |  |   |        
|----------------------- | ----------------- | --------- | ------------------------ | - | ------------------- |  | - | -------
|Consists of -           | December 31, 2006
|                        | Cost              |           | Accumulated
Amortization |   | Net Carrying
Amount
|Land                    | $                 | 90,000    |                          | $ | -                   |  | $ | 90,000 
|Building                |                   | 560,927   |                          |   | 58,285              |  |   | 502,642
|Office equipment        |                   | 39,394    |                          |   | 29,485              |  |   | 9,909  
|Manufacturing equipment |                   | 569,474   |                          |   | 375,426             |  |   | 194,048
|Computer equipment      |                   | 108,454   |                          |   | 51,235              |  |   | 57,219 
|                        | $                 | 1,368,249 |                          | $ | 514,431             |  | $ | 853,818







7.

OTHER ASSETS



|              |                   |        |                          |   |                     |  |   |       
|------------- | ----------------- | ------ | ------------------------ | - | ------------------- |  | - | ------
|Consists of - | December 31, 2007
|              | Cost              |        | Accumulated
Amortization |   | Net Carrying
Amount
|Patents       | $                 | 60,961 |                          | $ | 5,531               |  | $ | 55,430





|              |                   |        |                          |   |                     |  |   |       
|------------- | ----------------- | ------ | ------------------------ | - | ------------------- |  | - | ------
|Consists of - | December 31, 2006
|              | Cost              |        | Accumulated
Amortization |   | Net Carrying
Amount
|Patents       | $                 | 53,866 |                          | $ | 4,175               |  | $ | 49,691





F-11



---







STELLAR PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS

(Expressed in Canadian dollars)

DECEMBER 31, 2007 AND 2006

8.

LOAN RECEIVABLE

During the year ended December 31, 2007 the Company received a subordinated convertible promissory note and a common share purchase warrant to purchase 15,000 shares from an unrelated corporation, in the amount of US$15,000 (Cdn$14,822).  The note matures in 2 years and bears interest at a rate per annum of 6%.  The warrant entitles the Company to acquire 15,000 common shares of the unrelated corporation anytime on or before July 15, 2016 at $0.001 per common share.  During 2007, the Company converted its warrants to common shares for US$15.00, the common share price was US$0.001 at the time of exercise.  The Company used the fair value basis to calculate the value of the asset and allocated the entire US$15,000 to the promissory note.  The change in the value recorded was the result of the fluctuation in the value of the Canadian dollar relative to the US dollar.

9.

CAPITAL STOCK

(a)

Common Shares

Authorized: An unlimited number of Common Shares, with no par value.

|                                                |               |  |   |          
|----------------------------------------------- | ------------- |  | - | ---------
|                                                | #  of  Shares |  |   | $ Amount 
|Balance, January 1, 2006                        | 23,470,190    |  | $ | 8,100,253
|Issued for consulting services rendered in 2005 | 2,500         |  |   | 2,275    
|Issued for cash consideration                   | 346,350       |  |   | 197,026  
|Balance, December 31, 2006                      | 23,819,040    |  |   | 8,299,554
|Issued for consulting services rendered in 2006 | 3,500         |  |   | 3,500    
|Balance, December 31, 2007                      | 23,822,540    |  | $ | 8,303,054



(b)

Shares to be Issued

During 2007, 3,500 (2006  2,500) Common Shares were issued to satisfy in full, a debt for consulting services which were rendered and expensed in 2006 with a value of $3,500 (2006 - $2,275). Subsequent to the year ended 2007, there were no Common Shares outstanding to be issued.

(c)

Paid-in Capital Options  Outstanding

|                                                              |        |          
|------------------------------------------------------------- | ------ | ---------
|The activities in the paid-in capital options are as follows: | Amount
|Balance, January 1, 2006                                      | $      | 545,025  
|Expense recognized for options to consultants                 |        | 34,534   
|Options exercised                                             |        | (40,863) 
|Expense recognized for options issued to employees/ directors |        | 77,703   
|Options issued to employees expired                           |        | (6,561)  
|Options issued to consultants expired                         |        | (95,848) 
|Balance, December 31, 2006                                    |        | 513,990  
|Expense recognized for options issued to employees/ directors |        | 31,107   
|Options issued to employees expired                           |        | (253,419)
|Options issued to consultants expired                         |        | (168,676)
|Balance, December 31, 2007                                    | $      | 123,002  





F-12



---





STELLAR PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS

(Expressed in Canadian dollars)

DECEMBER 31, 2007 AND 2006

9.

CAPITAL STOCK (continued)

(d)

Paid in Capital Options  Expired



|                                      |        |        
|------------------------------------- | ------ | -------
|                                      | Amount
|Balance, January 1, 2006              | $      | 98,913 
|Options issued to employees expired   |        | 95,848 
|Options issued to consultants expired |        | 6,561  
|Balance, December 31, 2006            |        | 201,322
|Options issued to employees expired   |        | 168,676
|Options issued to consultants expired |        | 253,419
|Balance, December 31, 2007            | $      | 623,417

(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, 2007, the maximum number of Common Shares that may be issued under the Plan was 4,629,452 (2006 - 4,629,452).

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 five years from the date of the grant of the option.



During the year ended December 31, 2007, the Company recorded a total of $31,107 (2006 - $112,237) as an expense for options issued to directors, officers, employees and consultants.  Included in this number were 140,000 options to purchase Common Shares (2006  no options) which were issued by the Company to its employees, for services rendered in 2007.  The Company recorded $27,186 (2006 - $77,703) as selling, general and administrative expense related to these options. In addition, during the year, the Company recorded an expense of $3,921 (2006 - $$50,151) related to 110,000 options granted to employees in 2005 which fully vested in 2007.  In 2007, the Company did not recognize any expenses related to options issued to consultants (2006 - $34,534). The total number of options outstanding as at December 31, 2007 was 355,000 (2006  1,010,000).

The fair value of options granted in 2007 was estimated as $0.69 at the date of grant using the Black-Scholes option-pricing model with the following assumptions:

|                        |  |        
|----------------------- |  | -------
|Risk-free interest rate |  | 4.66%  
|Expected life           |  | 3 years
|Expected volatility     |  | 89.9%  
|Dividend yield          |  | 0%     

The Companys computation of expected volatility for the year ended December 31, 2007 and 2006 is based on the Companys market close price for the 30 systematic observations over the period equal to the expected life of the options. The Companys computation of expected life is calculated using the simplified method. The Companys dividend yield is 0.0%, since there is no history of paying dividends and there are no plans to pay dividends. The Companys risk-free interest rate is the Canadian treasury bond rate for the period equal to the expected term.

On June 29, 2005, pursuant to resolutions by the Board of Directors and shareholders, the Company increased the number of options in the plan to 4,629,452 from 4,157,841.





F-13



---







STELLAR PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS

(Expressed in Canadian dollars)

DECEMBER 31, 2007 AND 2006

9.

CAPITAL STOCK (continued)

The following table presents information relating to stock options outstanding and exercisable at December 31, 2007.

|                        |  |                    |  |                                             |  |   |                                 |  |                                         |  |   |                                
|----------------------- |  | ------------------ |  | ------------------------------------------- |  | - | ------------------------------- |  | --------------------------------------- |  | - | -------------------------------
|Range of
Exercise Price |  | Number
Outstanding |  | Weighted Average Remaining Contractual
Life |  |   | Weighted Average Exercise Price |  | Number Exercisable at December 31, 2007 |  |   | Weighted Average
Exercise
Price
|$0.69 to $.090          |  | 115,000            |  | 2.5 years                                   |  | $ | 0.69                            |  | 38,333                                  |  | $ | 0.69                           
|$0.91 to $1.50          |  | 120,000            |  | 1 years                                     |  |   | 0.91                            |  | 120,000                                 |  |   | 0.91                           
|$1.51 to $1.70          |  | 120,000            |  | .36 years                                   |  |   | 1.66                            |  | 120,000                                 |  |   | 1.66                           
|                        |  | 355,000            |  | 1.27 years                                  |  | $ | 1.09                            |  | 278,333                                 |  | $ | 1.14                           

The following table presents information relating to stock options outstanding and exercisable at December 31, 2006.

|                        |  |                    |  |                                             |  |   |                                 |  |                                         |  |   |                                
|----------------------- |  | ------------------ |  | ------------------------------------------- |  | - | ------------------------------- |  | --------------------------------------- |  | - | -------------------------------
|Range of
Exercise Price |  | Number
Outstanding |  | Weighted Average Remaining Contractual
Life |  |   | Weighted Average Exercise Price |  | Number Exercisable at December 31, 2007 |  |   | Weighted Average
Exercise
Price
|$0.91 to $1.99          |  | 395,000            |  | 1.5 years                                   |  | $ | 1.19                            |  | 342,500                                 |  | $ | 1.23                           
|$2.00 to $2.05          |  | 245,000            |  | .24 years                                   |  |   | 2.02                            |  | 245,000                                 |  |   | 2.02                           
|$2.08 to $3.52          |  | 370,000            |  | .28 years                                   |  |   | 2.41                            |  | 370,000                                 |  |   | 2.41                           
|                        |  | 1,010,000          |  | .75 years                                   |  | $ | 1.84                            |  | 957,500                                 |  | $ | 1.89                           

The activities in options outstanding are as noted below:

|                           |           |  |   |                                
|-------------------------- | --------- |  | - | -------------------------------
|                           | Options   |  |   | Weighted
Average
Exercise
Price
|Balance, January 1, 2006   | 1,540,000 |  | $ | 1.56                           
|Cancelled                  | (5,000)   |  |   | .69                            
|Exercised                  | (346,350) |  |   | 0.45                           
|Forfeited                  | (178,650) |  |   | 2.14                           
|                           |           |  |   |                                
|Balance, December 31, 2006 | 1,010,000 |  |   | 1.84                           
|Granted                    | 140,000   |  |   | .69                            
|Cancelled                  | (25,000)  |  |   | .69                            
|Forfeited                  | (770,000) |  |   | 1.99                           
|                           |           |  |   |                                
|Balance, December 31, 2007 | 355,000   |  | $ | 1.09                           



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 compensation expense.



F-14



---





STELLAR PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS

(Expressed in Canadian dollars)

DECEMBER 31, 2007 AND 2006

9.

CAPITAL STOCK (continued)

The weighted average fair value of options granted during the year ended December 31, 2007 was estimated to be $0.69.  There were no options granted during the year ended December 31, 2006.

A summary of the Companys non-vested stock options as of December 31, 2007 and activity during the year is as follows:

|                                |           |  |                                 |    
|------------------------------- | --------- |  | ------------------------------- | ---
|                                | Options   |  | Weighted
Average
Exercise Price
|Non-vested at January 1, 2007   | 103,333   |  | $                               | .91
|Granted                         | 140,000   |  |                                 | .69
|Vested                          | (141,667) |  |                                 | .69
|Forfeited                       | (25,000)  |  |                                 | .69
|Non-vested at December 31, 2007 | 76,667    |  | $                               | .85

As at December 31, 2007 the number of unvested options expected to vest (including the impact of expected forfeitures as required under SFAS 123R) has been estimated at 62,943, with a weighted average contractual life of 1.5 years and exercise price of $0.69. The approximate value of total unrecognized compensation cost related to unvested stock options is $8,799 (2006 - $3,921).  All unvested options will fully vest in 2008 and will be recognized as an expense in 2008.

10.

REVENUES

Revenue for the year includes products sold in Canada and, international sales of products and raw materials sold at cost to the Companys European licensee.  Revenue earned is as follows:

|                    |              |           |      |   |          
|------------------- | ------------ | --------- | ---- | - | ---------
|                    | December 31,
|Products Sales      | 2007         |           | 2006
|Domestic sales      | $            | 1,429,921 |      | $ | 1,314,641
|International sales |              | 224,429   |      |   | 106,343  
|Other revenue       |              | 10,245    |      |   | 6,280    
|Total Product Sales | $            | 1,664,595 |      | $ | 1,427,264



|                                      |              |         |      |   |          
|------------------------------------- | ------------ | ------- | ---- | - | ---------
|                                      | December 31,
|Royalties and licensing revenue       | 2007         |         | 2006
|Licensing fees                        | $            | 47,413  |      | $ | 2,548,352
|Royalty payments                      |              | 535,257 |      |   | 402,081  
|Total royalties and licensing revenue | $            | 582,670 |      | $ | 2,950,433

The Company currently sells its own products and is in-licensingother products in Canada.  In addition, revenues include products which the Company out-licenses in Europe, the Caribbean, Lebanon, Malaysia, Kuwait, Romania the United Arab Emirates and Turkey.  The continuing operations reflected in the statements of operations include Stellars activity in these markets.



11.

OTHER PRODUCT COST

In November of 2005, the Company experienced higher than anticipated reports of side effects with one of its products, NeoVisc and withdrew this batch from sale.  Subsequent to a second batch of the product released in early 2006, the Company decided to stop the sale of product from this batch.  The Company recorded $29,205 (2007  nil) as other product cost in 2006.



F-15



---





STELLAR PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS

(Expressed in Canadian dollars)

DECEMBER 31, 2007 AND 2006

12.

INCOME TAXES

Rate reconciliation

A reconciliation of income tax expense (recovery) computed at the statutory income tax rate included in the statements of operations follows:

|                                                          |      |          |      |   |          
|--------------------------------------------------------- | ---- | -------- | ---- | - | ---------
|Income tax expense (recovery) is comprised of:            | 2007 |          | 2006
|Income tax expense (recovery) at statutory rate at 36.12% | $    | (53,256) |      | $ | 453,387  
|Adjusted for:                                             |      |          |      |   |          
|Benefits (expense) realized from loss carried forward     |      | -        |      |   | (498,220)
|Valuation allowance                                       |      | 39,047   |      |   | -        
|Non-deductible expenses                                   |      | 14,209   |      |   | 44,833   
|                                                          | $    | -        |      | $ | -        



Deferred tax assets and liabilities reflect losses carry-forward, the cumulative carry-forward pool of scientific research and experimental development ("SR&ED") expenditures and the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their corresponding tax basis. Significant components of net deferred tax assets are listed below:

Components of deferred income tax assets and liabilities:

|                                                                                                                                            |      |                          |      |   |                         
|------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ------------------------ | ---- | - | ------------------------
|                                                                                                                                            | 2007 |                          | 2006
|Benefit of net operating losses carry-forward                                                                                               | $    | 649,500                  |      | $ | 835,900                 
|Book values of property and equipment and intangible assets in excess of tax bases
Benefit of SR&ED expenditures
Non-refundable tax credits |      | (15,200)
527,600
326,000 |      |   | (23,000)
517,100
319,500
|Valuation allowance                                                                                                                         |      | (1,487,900)              |      |   | (1,649,500)             
|                                                                                                                                            | $    | -                        |      | $ | -                       



The valuation allowance was provided against the net deferred tax assets at December 31, 2007 and 2006, because the realization of the asset remains to be not determinable.

The Company has non-capital losses carry-forward for income tax purposes in the amount of $2,239,400 which may be applied against future years taxable income. The losses expire as follows:

|     |   |          
|---- | - | ---------
|2010 | $ | 189,300  
|2014 |   | 780,800  
|2015 |   | 1,177,300
|2027 |   | 92,000   
|     | $ | 2,239,400



Tax years 2004 through 2007 remain open to examination by the taxing jurisdictions to which we are subject. The 2005 tax year is pending financial examination by federal or provincial taxing authorities. The 2006 and 2007 tax ears are currently being prepared for filing.  The Company has not been notified by any taxing jurisdictions of any proposed or planned examination.





F-16



---





The non-refundable portion of the tax credits as at December 31, 2007 was $325,900.  The non-refundable tax credit details are as follows:



|     |   |        
|---- | - | -------
|2004 | $ | 148,700
|2005 |   | 127,500
|2006 |   | 43,200 
|2007 |   | 6,500  
|     | $ | 325,900



The cumulative carry-forward pool of SR&ED expenditures applicable to future years, with no expiry date, is $1,819,300.



Effective January 1, 2007, the Company adopted FIN 48. FIN 48 requires a company to evaluate whether a tax position taken by the company will more likely than not be sustained upon examination by the appropriate tax authority. It also provides guidance on how a company should measure the amount of benefit that the company is to recognize in its financial statements. As a result of the implementation of FIN 48, there was no material impact on the Company's financial statements.



It is the Companys policy to recognize interest and penalties related to income tax matters in income tax expense.

13.

EARNINGS (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 diluted earnings per share has not been calculated for 2007 as the Company was in a loss position and therefore the diluted earnings per share would be anti-diluted.

The following table sets forth the computation of earnings (loss) per share:

|                                                             |      |            |      |   |           
|------------------------------------------------------------ | ---- | ---------- | ---- | - | ----------
|For the periods ended December 31                            | 2007 |            | 2006
|Net income (loss) per share available to common shareholders | $    | (147,441)  |      | $ | 1,255,225 
|Weighted average Common Shares outstanding                   |      | 23,821,562 |      |   | 23,575,479
|Diluted weighted average number of Common Shares outstanding |      | 23,821,562 |      |   | 23,634,070
|Basic earnings (loss) per share                              | $    | (0.01)     |      | $ | 0.05      
|Diluted earnings per share                                   | $    | -          |      | $ | 0.05      

14.

STATEMENT OF CASH FLOWS

Changes in non-cash balances related to operations are as follows:

|                                                         |      |           |      |   |          
|-------------------------------------------------------- | ---- | --------- | ---- | - | ---------
|For the periods ended December 31                        | 2007 |           | 2006
|Accounts receivable                                      | $    | (72,150)  |      | $ | (41,955) 
|Inventories                                              |      | (30,443)  |      |   | 13,740   
|Prepaids, deposits and sundry receivables                |      | 11,341    |      |   | 97,107   
|Taxes recoverable                                        |      | (164,714) |      |   | -        
|Accounts payable and accrued liabilities                 |      | 44,250    |      |   | (249,134)
|Deferred revenues                                        |      | 9,073     |      |   | (41,897) 
|                                                         |      | (202,643) |      |   | (222,139)
|                                                         |      |           |      |   |          
|During the year there was no interest paid (2006  nil). |      |           |      |   |          







F-17



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STELLAR PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS

(Expressed in Canadian dollars)

DECEMBER 31, 2007 AND 2006

15.

CONTINGENCIES AND COMMITMENTS

(a)

Royalty Agreements

In September 2000, the Company entered into a royalty agreement for sales of Uracyst®.   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 a 2% rate effective October 1, 2003 and this royalty will remain at 2% until the end of the agreement on September 30, 2008. The total royalty payments for the year ended December 31, 2007 were $5,324 (2006 - $4,549). These amounts have been recorded as royalty expense in selling, general and administrative.

In February 2002, the Company entered into a royalty agreement for products which were introduced to the Company by a consultant.  The agreement involves royalty payments, which were paid based on gross dollar sales.   The schedule for royalty payments is 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.



The total royalty payments in 2007 were $38 which was based on sales under $1,000,000.  As of the end of July 2007 the Company no longer distributes this product, therefore no further royalty payments are expected to be recorded.

(b)

License Agreements

The Company has the following license agreements in place:

In November 2007, the Company entered into license and supply agreements with Torrex Chiesi Pharma GmbH ("Torrex Chiesi") to grant the exclusive rights and license to use the methods and technical know-how for the purposes of developing, marketing and selling NeoVisc in Eastern Europe.  The territory covers a number of countries, including Austria, Czech Republic, Slovakia, Croatia, Serbia, Montenegro, Macedonia, Bosnia, Herzegovina, Poland, Hungary, Russia and the Commonwealth of Independent States ("CIS").  As provided in the agreements, the Company received non-recurring, non-refundable license fees of which $47,413 was recognized as income in 2007.  The remaining amount of $2,587 will be recorded once the Companys obligation as related to the license fee has been completed.  The term of this agreement will continue for a period of five years and will be renewable for an additional three years, unless earlier terminated by either party in accordance with the agreement.

In December 2006, the Company entered into license and supply agreements with Watson Pharma, Inc. to grant the exclusive rights and license to use the methods and technical know-how for the purposes of developing, marketing and selling Uracyst products in the United States.  As provided in the agreements, the Company received non-recurring, non-refundable license fees which were recognized as income in 2006. In addition to an upfront payment made to the Company upon signing, this agreement will provide Stellar with milestone payments and an ongoing royalty stream from future sales of Uracyst in the United States.    The term of this agreement will continue for a period of fifteen years and will be renewable for an additional two years, unless earlier terminated by either party in accordance with the agreement.

In July 2006, the Company entered into a licensing agreement with Bio-technic Romanaia SRL for NeoVisc in Romania.  This agreement is for a period of three years.

The Company also entered into a license agreement with Megapharm for the sale of Uracyst in Israel in December 2005. While Uracyst has received regulatory approval from the ministry of health; it still lacks approval on the reimbursement formulary. Sales for Uracyst in this market are expected to remain slow until reimbursement status is received. This agreement is for a period of three years.





F-18



---





STELLAR PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS

(Expressed in Canadian dollars)

DECEMBER 31, 2007 AND 2006

15.

CONTINGENCIES AND COMMITMENTS (continued)

In November 2005, the Company entered into a license agreement with Al-Mohab Trading & Contracting for the sale of NeoVisc in Kuwait.

In September 2005, the Company entered into a licensing agreement with Shanghai Ya Jun Medical for the sale of Uracyst in China.  All product specifications have been approved by the Chinese regulatory body ("SFDA") and the final document submission was delivered to the SFDA in June 2007.  Although the Company anticipated this registration would have occurred in 2007, to-date such approval has not been granted. The Company is hopeful that final approval by SFDA will received in the first half of 2008.

In August 2005, the Company entered into a distribution agreement with TECHNIMED for the sale of NeoVisc in Lebanon.  In July 2005, the Company entered into a license agreement with Innogen Ilac for the sale of NeoVisc in Turkey.  Each of these agreements is for a period of three years.

On June 30, 2004, the Company signed a NeoVisc® license agreement with Triptibumis Sdn. Bhd. ("Triptibumis") for Malaysia, Singapore and Brunei.  Triptibumis has obtained reasonable success in this small, competitive market.  New areas of the territory however, have been slow in receiving regulatory approval.  Although it can not be certain, it is expected that some of these territories should receive approval in the first half of 2008.  The term of this agreement has been extended until June 2010.

In October 2003, the Company entered into an exclusive distribution agreement with Matritech, Inc., to sell BladderChek in the Canadian market.  In October 2004, Stellar commenced selling BladderChek in Canada.

In June 2003, Stellar entered into distribution agreements with BurnsAdler Pharmaceuticals to sell Stellars products in Latin America and the Caribbean. Sales have been ongoing in the Dominion Republic and Bahamas, two of the smaller territories included in the territory, but progress has been slow in the major Latin American markets due to competitive pricing issues.

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 received a combination of non-recurring, non-refundable license fees and royalty payments.  In April 2007, the Company terminated its license agreement with G. Pohl-Boskamp GmbH & Co. ("Pohl-Boskamp"), which provided for the sale of Uracyst products in Europe. Pohl-Boskamp disputed the basis on which the Company terminated the agreement and the consequences that result from such termination. The parties attended mediation in September 2007 in which an agreement was reached and a settlement made. Under the terms of the settlement the parties agreed that the license agreement will remain in full force and effect until March 31, 2008.  Further, Pohl-Boskamp agreed to pay Stellar the sum of €200,000 (Cdn$283,920), payable in two equal installments of €100,000 due on September 20, 2007 and December 31, 2007.  The Company has recorded the $283,920 in the following manner:

1) $210,220 as an offset for expenses incurred in regards to the termination and mediation processes which has been recorded as a reduction to selling, general and administration expense;

2) the remaining $73,700 has been recorded as Interest and other income.



F-19



---





STELLAR PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS

(Expressed in Canadian dollars)

DECEMBER 31, 2007 AND 2006

15.

CONTINGENCIES AND COMMITMENTS (continued)

(c)

Distribution Agreement

In October 2003, the Company entered into an exclusive agreement with a company in the United States, to manufacture and 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 correct a material default under the agreement.  The Company may terminate the agreement immediately, in the event that any conditions specified in the agreement are not satisfied.

(d)

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® and Uracyst® products.  The agreement is for five years and may be renewed only by a written agreement between the parties.

(e)

Leases

The Company presently leases office and warehouse equipment under operating leases.  At December 31, 2007, the remaining future minimum lease payments under operating leases are $19,822 (2005 - $2,383).

The Company is obligated to make the following operating lease payments as of December 31, 2007:

|                            |         |        |        |        |       
|--------------------------- | ------- | ------ | ------ | ------ | ------
|                            | Total   | 2008   | 2009   | 2010   | 2011+ 
|Operating lease obligations | $19,822 | $5,096 | $5,096 | $4,447 | $5,183

(f)

Consulting Agreements

In May 2005, the Company entered into a research and development agreement with a major United States University.  This program is on Bladder Urothelial research in interstitial cystitis and will cost the Company US$235,923 for the period May 2005 to January 2008, to be paid over the term of the agreement. During the year, the Company has recorded $84,871 (2006 - $126,216) as research and development costs.

16.

RELATED PARTY TRANSACTIONS

The Company entered a fiscal advisory and consulting agreement with LMT Financial Inc. (a company beneficially owned by a director and his spouse) for services to be provided. Compensation under the agreement is $6,000 per month.  The Company has recorded $72,000 (2006 - $72,000) as selling, general and administrative costs.

17.

SIGNIFICANT CUSTOMERS

During the year, the Company had one customer that represented 36.0% of sales (2006  36.0%).



F-20



---







STELLAR PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS

(Expressed in Canadian dollars)

DECEMBER 31, 2007 AND 2006

18.

FINANCIAL RISKS

(a)     Credit Risk

The Companyis 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

The Company's cash and cash equivalents are maintained with two Canadian banking institutions and one institution in Ireland.  Deposits held with these banks may exceed the amount of insurance provided on such deposits ($60,000 per bank). Generally, these deposits may be redeemed upon demand and, therefore, bear minimum risk.

As at December 31, 2007 the Company had two customers which made up 67.3% of the outstanding accounts receivable, in comparison to two customers which made up 78.0% at December 31, 2006.  The largest portion of the outstanding accounts receivable is in regards to royalty revenue owed at the end of the year, which was $151,834 or 55.8% (2006  $128,075 or 64.1%) of this value.  Payment was received in full on February 12, 2008.

(c)

Currency Risk

The Company is subject to currency risk through its revenues earned and expenses incurred in United States dollars and Euros.  Unfavorable changes in the exchange rate may affect the operating results of the Company.  The Company does not actively use derivative instruments to reduce its exposure to foreign currency risk.  However, dependant on the nature, amount and timing of foreign currency receipts and payments, the Company may enter into forward exchange contracts to mitigate the associated risks.  There were no forward exchange contracts outstanding at December 31, 2007 and 2006.

(d)

Fair Value of Financial Assets and Liabilities

The carrying amounts of the Companys financial assets and liabilities including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value due to short-term maturity of these items.



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STELLAR PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS

(Expressed in Canadian dollars)

DECEMBER 31, 2007 AND 2006

19.

SEGMENTED INFORMATION

The Company is engaged in one line of business which is in the development and marketing of polysaccharide-based therapeutic products used in a treatment of osteoarthritis and certain types of cystitis.  Currently, all of the Companys assets are located in Canada, and all direct sales take place in Canada.  Licensing arrangements have been obtained to distribute and sell the Companys products in various countries including the United States of America.

The Company is engaged in the sale of three lines of product:

|            |       |      
|----------- | ----- | -----
|            | 2007  | 2006 
|NeoVisc     | 60.3% | 26.0%
|Uracyst     | 11.9% | 5.2% 
|BladderChek | 1.1%  | 0.9% 
|Other       | 26.7% | 67.9%

20.

COMPARATIVE FIGURES

Certain comparative figures have been reclassified to conform to the current year's presentation.





F-22