UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K

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|-------------------------------------------------------------- | ----------------------------------------------------------------------------------
|P                                                              | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|                                                               |                                                                                   
|For the fiscal year ended: December 31, 2008                  
|                                                               |                                                                                   
|                                                               | 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)

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|Securities registered pursuant to Section 12(b) of the Act:     
|                                                                 |  |                      
|Common Stock, no par value                                       |  | NASDAQ Global Markets
|(Title of class)                                                 |  | (Name of exchange)   
|                                                                 |  |                      
|Securities registered pursuant to Section 12(g) of the Act: None

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|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý                                                                                                                                                                                                                                  
|Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o    No ý                                                                                                                                                                                                         
|Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o
|Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. o                                
|Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.                                                                        
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|Large accelerated filer o                                                                                                                                                                                                                                                                                                        | Accelerated filer o | Non-accelerated filer o(Do not check if a smaller
reporting company) | Smaller reporting company ý
|The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, as reported on the NASDAQ Global Market, as of the last business day of the registrant's most recently completed second fiscal quarter was $5,249,500.
|Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý                                                                                                                                                                                                  
|On March 31, 2009, 23,515,040 shares of the registrant's common stock were issued and outstanding.                                                                                                                                                                                                                              









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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 1A 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 31, 2009, the exchange rate for Canadian dollars/United States dollars was $1.00 (Cdn.) = $0.7935 (U.S.).

Set forth below are the exchange rates based on the Bank of Canada noon rates for the Canadian dollar equivalent expressed in United States currency during 2008, 2007 and 2006.

|               |  |                          |  |        |  |       
|-------------- |  | ------------------------ |  | ------ |  | ------
|               |  | Years ended December 31,
|               |  | 2008                     |  | 2007   |  | 2006  
|At End of Year |  | 0.8166                   |  | 1.0120 |  | 0.8581
|Average        |  | 0.9381                   |  | 0.9304 |  | 0.8817
|High           |  | 1.0289                   |  | 1.0905 |  | 0.9099
|Low            |  | 0.7711                   |  | 0.8437 |  | 0.8528



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. 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 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.

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 three 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 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.

During the three-month period ended, the Company signed four license agreements for various European territories, to improve penetration into these markets. As provided in these agreements, the Company received $232,600 in non-recurring, non-refundable license fees, which were recognized as income in 2008. 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 these European markets.   The terms of these license agreements are as follows:

|                              |                |                                                    |               
|----------------------------- | -------------- | -------------------------------------------------- | --------------
|Licensee                      | Agreement Date | Territory                                          | Agreement Term
|EIP Eczacibasi Ilac Pazarlama | October 2008   | Turkey and the Turkish Republic of Northern Cyprus | 5 years +     
|Galen Limited                 | December 2008  | United Kingdom and the Republic of Ireland,        | 10 years +    
|VitaFlo Scandinavia AB        | December 2008  | Denmark, Finland, Iceland, Norway, Sweden          | 5 years +     
|EuroCept B. V.                | December 2008  | Netherlands, Belgium and Luxembourg                | 10 years +    

+ Extensions of 3 years applies to these contracts.

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").  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.



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In December 2006, the Company entered into license and supply agreements with Watson Pharma, Inc. ("Watson"), whereby Watson was granted 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 July 2006, the Company entered into a licensing agreement with Bio-technic Romania SRL for NeoVisc in Romania.  Sales in this territory have showed significant growth in 2008, with a 209.5% growth over 2007. The term of this agreement has been extended until June 2014.

In December 2005, the Company also entered into a license agreement with Megapharm Ltd 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. Further sales for Uracyst in this market are not expected until reimbursement status is received, which at the time of this report is uncertain.. The term of this agreement is for a period of five years.

In November 2005, the Company entered into a license agreement with Al-Mohab Trading & Contracting for the sale of NeoVisc in Kuwait.  This agreement was terminated in September 2008 due to lack of performance.

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 uncertain at this time, as to when final approval by SFDA will be received.

In August 2005, the Company entered into a distribution agreement with Technimed for the sale of NeoVisc in Lebanon.  Although, sales recorded for Technimed continue to be a small portion of the international revenues, an increase of 74.6% in 2008 compared to those recorded in 2007. The term of this agreement has been extended until June 2010.

In July 2005, the Company entered into a license agreement with Innogen Ilac for the sale of NeoVisc in Turkey.  This agreement expired in 2008 and was not renewed on or before its renewal date.

In June 2004, the Company signed a NeoVisc® license agreement with Triptibumis Sdn. Bhd. ("Triptibumis") for the sale of NeoVisc in 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 was expected that some of these territories would receive approval in the first half of 2008, to date no such approvals have occurred.  The Company is uncertain at this time as to when such regulatory approval will occur. The term of this agreement has been extended until June 2010.

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. The term of this agreement is for a period of ten years.

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 thereof, the Company received a combination of non-recurring, non-refundable license fees and royalty payments.  This agreement was terminated effective March 31, 2008.

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.



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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.

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.

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.







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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.

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 OA sufferers in American to be 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.



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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.

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

(v)

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

Stellar developed Uracyst, a sterile 2.0% sodium chondroitin sulfate solution available in a 20 mL vial. Uracyst is used in the treatment of certain forms of IC and non-common cystitis. This product is 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.

Uracyst is typically instilled weekly for six 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 was based upon a percentage of Uracyst net sales. The royalty percentage for the period which began on September 1, 2003 and ended on August 31, 2008 was based on a declining rate of 5% to 2%. The Companys obligation to Dr. Steinhoff in regards to this agreement was completed in October 2008, with the issuance of the final royalty payment. 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 a 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 was 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 would remain in full force and effect until March 31, 2008. In late 2008, the Company signed four new Uracyst licensing agreements for eleven European countries and continues in discussions with other potential partners for the remaining European countries. Stellar expects to have most of these markets covered and selling Uracyst in 2009.

In addition, the Company signed the following agreements for Uracyst:

(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 Megapharm 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.

(iv)

In late 2008, the Company signed four licensing agreements in Europe to improve penetration into this important market. EIP Eczacibasi Ilac Pazarlama signed an Uracyst licensing agreement in October 2008, for Turkey and the Turkish Republic of Northern Cyprus. In December 2008, the Company signed Uracyst license agreements with; Galen Limited, for the United Kingdom and the Republic of Ireland, with VitaFlo Scandinavia AB, for Denmark, Finland, Iceland, Norway, Sweden and with EuroCept B. V. for the Netherlands, Belgium and Luxembourg.

The Company used consultants to source licensees for European contracts entered into by Stellar in 2008.   These agreements involved royalty payments to be issued to the consultants upon the signing of the license agreement.  The royalty payments being issued to consultants included 10% of the upfront fees received from the licensee and 10% to 50% of any future milestone payments received.  In addition, royalty payments were also based on 4 % of the total Uracyst sales at a declining rate of 1% per year over a four-year period, declining to a 1% rate effective in the final year.

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.



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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 six months of active treatment before patients start to show symptomatic improvement.

Market For Uracyst: 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 from which Canada extrapolates to between 75,000 to 150,000 IC patients.  It is believed that all other markets have a similar per capita incidence of IC.

Marketing Strategy: Stellar currently markets Uracyst 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 European licensees.

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 per month as compared to $80 per month for DMSO and $65 per month for Uracyst.

BladderChek

Stellar has licensed BladderChek for the Canadian market from Inverness Medical Innovations North America, Inc. (successor to certain contracts of Matritech, Inc.). The initial term of this licence began on January 1, 2004 and ends on December 31, 2011. 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.



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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.

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s 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 five 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 seek 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 that any of its current customers intends to discontinue its relationship with the Company or to reduce purchases of the Companys products.

Human Resources

The Company currently employs thirteen full-time employees. Eight of these employees are located at the Companys main office in London Ontario, Canada. The remaining five 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. The 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.



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Manufacturing

Stellar currently outsources the manufacturing of its products to special sterile facilities, 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.

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 Farmaceutici S.p.A. and the chondroitin sulfate used in the formulation of Uracyst from Bioiberica S.A., 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 files 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 re-certification on March 12, 2009.

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. Both NeoVisc and Uracyst are currently CE marked.

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 believes 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.

Although it can not be certain, Stellar anticipates that the FDA approval required to market Uracyst in the United States will be obtained around the end of 2011. 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 certain 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, 2008 and 2007, the Company expensed approximately $97,700 (2007- $102,800) on in-house research and development activities. The expense in 2008 however, was offset by provincial government tax cash refunds of $34,900 (2007 - $158,000) for research and development activities preformed in 2006, 2007 and 2008.

Item 1A.

RISKS AND UNCERTAINTIES

Investing in common shares in the capital of Stellar (the "Common Shares") involves a degree of risk.  You should carefully consider the following factors and all other information contained in this report before purchasing of our Common Shares.  If any of the following risks occur, our business, financial condition and/or results of operations could be materially and adversely affected.  In that case, the trading price of our Common Share could decline, and you may lose some or all of your investment.

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;



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-

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.

Competitive Risks

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.

Manufacturing Risks

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.

International Contract & Currency Risks

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.

Additional Information

We make available free of charge through our website, www.stellarpharma.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as soon as reasonably practicable after those reports are filed with or furnished to the Securities and Exchange Commission (SEC).

The public may read any of the items we file with the SEC at the SECs Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding the Company and other issuers that file electronically with the SEC at http://www.sec.gov.



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ITEM 2.

PROPERTIES

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 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

No matters were submitted to a vote of shareholders in the quarter ended December 31, 2008.



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PART II

ITEM 5.

MARKET FOR REGISTRANTS COMMON EQUITY, RELATED TO STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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 
|     |  |                |  |           |  |     
|2008 |  | First Quarter  |  | 0.58      |  | 0.33
|     |  | Second Quarter |  | 0.45      |  | 0.33
|     |  | Third Quarter  |  | 0.51      |  | 0.32
|     |  | Fourth Quarter |  | 0.42      |  | 0.22
|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



On March 31, 2009, the last reported per share sale price for the Common Shares on the OTC Bulletin Board was $0.29 (USD).

Purchases of Equity Securities (expressed in Canadian dollars)

|                  |  |                             |         |  |                              |   |      |                                                                |  |  |                                                              |  |  |  |           |  |  | 
|----------------- |  | --------------------------- | ------- |  | ---------------------------- | - | ---- | -------------------------------------------------------------- |  |  | ------------------------------------------------------------ |  |  |  | --------- |  |  | 
|Period            |  | Total # of
Shares
Purchased |         |  | Average
Price Paid
per Share |   |      | Total # of
Shares
Purchased
as Part of
Publicly Announced
Plan |  |  | Maximum #
of Shares
that May Yet
Be Purchased
Under the
Plan
|April 1 to 30     |  |                             | 55,000  |  |                              | $ | 0.38 |                                                                |  |  | 55,000                                                       |  |  |  | 1,136,127
|May 1 to 31       |  |                             | 50,000  |  |                              | $ | 0.36 |                                                                |  |  | 50,000                                                       |  |  |  | 1,086,127
|June 1 to 30      |  |                             | 12,500  |  |                              | $ | 0.32 |                                                                |  |  | 12,500                                                       |  |  |  | 1,073,627
|July 1 to 31      |  |                             | 30,000  |  |                              | $ | 0.33 |                                                                |  |  | 30,000                                                       |  |  |  | 1,043,627
|September 1 to 30 |  |                             | 25,000  |  |                              | $ | 0.42 |                                                                |  |  | 25,000                                                       |  |  |  | 1,018,627
|October 1 to 31   |  |                             | 50,000  |  |                              | $ | 0.38 |                                                                |  |  | 50,000                                                       |  |  |  | 968,627  
|November 1 to 30  |  |                             | 25,000  |  |                              | $ | 0.38 |                                                                |  |  | 25,000                                                       |  |  |  | 943,627  
|December 1 to 31  |  |                             | 25,000  |  |                              | $ | 0.27 |                                                                |  |  | 25,000                                                       |  |  |  | 918,627  
|Total             |  |                             | 272,500 |  |                              | $ | 0.36 |                                                                |  |  | 272,500                                                      |  |  |  | 918,627  

Holders

As at January 1, 2009, there were 28 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.



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Equity Compensation Plan Information

The table set forth below provides information as of December 31, 2008 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 rights in 
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     |  | 105,000                                                                                      |  | 0.69                                                                                                |  | 1,874,452                                                                                                                                     
|                                                           |  |                                                                                              |  |                                                                                                     |  |                                                                                                                                               
|Equity compensation plans not approved by security holders |  |                                                                                             |  |                                                                                                    |  |                                                                                                                                              
|                                                           |  |                                                                                              |  |                                                                                                     |  |                                                                                                                                               
|Total                                                      |  | 105,000                                                                                      |  | 0.69                                                                                                |  | 1,874,452                                                                                                                                     



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.

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-



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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 2008, 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.

ITEM 6.

SELECTED FINANCIAL DATA

Not applicable.

ITEM 7.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007 (in Canadian Dollars)

MANAGEMENT'S DISCUSSION AND ANALYSIS

General

The following discussion and analysis was prepared on March31, 2009 and 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.



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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 Securities and Exchange Commission defines critical accounting policies as those that are, in managements view, important to the portrayal of the Companys financial condition and results of operations and require managements judgment.  The Companys discussion and analysis of its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").  The preparation of these statements requires us the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses.  The Company basis its estimates on experience and on various assumptions that it believes 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 Financial Accounting Standards Board ("FASB")  Emerging Task Force ("EITF") Issue No. 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 collectibility is reasonably assured.  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 collectibility 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 upon delivery of the methods and technical know-how.

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 material future obligation, other than inconsequential and prefunctory support, as would be expected under such agreements and the amount of the royalty fee is determinable and collection is reasonably assured.

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.

RESULTS FOR THE YEAR ENDED DECEMBER 31, 2008

Total revenue for the year ended December 31, 2008 increased by 13.9% to $2,559,400 compared to $2,247,300 in the same period during 2007.  In 2008, the Canadian market showed positive growth. NeoVisc sales increased 3.6%, Uracyst sales increased 10.4% and BladderChek sales increase 39.1%, with a total increase in Canadian product sales of 4.8% (not including other items).  Given the market conditions in 2008, the Company felt these increases were exceptional.



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International revenues were impacted with the lack of Uracyst royalty revenues in the last nine months, due to the termination of the European market licensing agreement with Pohl Boskamp as of March 31, 2008.  Royalty revenues decreased by 61% to $208,500 in 2008 from $535,300 for the same period in 2007.  Conversely, total NeoVisc sales for the twelve month period ended December 31, 2008, were up by 31.8%, in large partly due to the improved sales from our European partners.  It is also noteworthy to report that although the Company showed a loss in its royalty revenues, the strong European market growth for NeoVisc product sales, contributed greatly to the overall improvement in revenues in 2008 over those reported in 2007.

In the fourth quarter of 2008, the Company signed four new licensing agreements for Uracyst in various European markets with product orders being shipped to each of these licensees in the first quarter of 2009, the Company expects these partners to be actively selling Uracyst going into the second quarter of 2009.  Certain non-refundable license fees from these agreements were recorded as licensing revenue in 2008. The Company continues discussions with other potential Uracyst licensees and expects to have agreements in place for all of Europe in 2009.

Gross Profit and Cost of Products Sold

Gross profit for the year ended December 31, 2008, was $2,003,000 up 15.9% from $1,728,000 recorded for the same period in 2007. This improvement in gross profits was driven by the positive sales growth in domestic and international markets. Stellars cost of goods sold for the year ended December 31, 2008, decreased to 26.3 % of sales compared to 31.2% of sales for the same period in 2007. This decrease is due to the inclusion in 2007 of $20,200 compared to $260 in 2008 of the write-downs for obsolete inventory.

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 year ended December 31, 2008, the Company recorded $97,700 (2007 - $102,800) 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 2008, was offset by provincial government tax credits of $34,900 (2007 - $158,000) from prior years, which the government has now assessed and approved.

During 2008, the Company continued its development of manufacturing processes to improve yields from both Uracyst and NeoVisc production. This work is an ongoing task allowing Stellar to improve its manufacturing processes and remain competitive in the global market.

In 2008, 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, 2008 was $2,010,400 compared to $2,090,500, for the same period in 2007. The total decrease of $80,100 or 3.8%, includes a reduction of $19,200 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 $11,900 (2007 - $31,100), a reduction of $36,800 (2008  $94,300 and 2007 - $131,100)) for consulting and other fees related to investor relations and a decrease of $67,000 related to effects of foreign currency (a foreign exchange gain of $40,400 recognized in 2008 compared to a foreign exchange loss of $26,700 recognized in 2007) recorded as selling, general and administrative expenses. This decrease was offset by an increase in royalty fees, related to royalty agreements for European licenses, of $24,600 to $29,600 for the year ended December 31, 2008, compared to $5,000 for the year ended December 31, 2007. During the year ended December 31, 2008, the Company paid fees to its board of directors totaling $38,000 (2007 - $41,000).

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.



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Interest and Other Income

Interest and other income during the twelve month period ended December 31, 2008 was $83,700 (2007 - $213,000). These amounts include interest received on short-term investments for both 2008 and 2007. In 2007, the amount included other income, which was 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.  Cash will be maintained in liquid investments.

SUMMARY OF QUARTERLY RESULTS



|                   |   |          |  |                   |           |                           |   |        | 
|------------------ | - | -------- |  | ----------------- | --------- | ------------------------- | - | ------ | 
|Quarter Ended      |   | Revenues |  | Net Income
(loss) |           | Earnings
(loss) per share
|December 31, 2008  | $ | 903,000  |  | $                 | 196,000   |                           | $ | 0.00  
|September 30, 2008 |   | 481,100  |  |                   | (60,300)  |                           |   | 0.00  
|June 30, 2008      |   | 647,900  |  |                   | (68,000)  |                           |   | 0.00  
|March 31, 2008     |   | 527,400  |  |                   | (98,800)  |                           |   | 0.00  
|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)
|                  

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 Year Ended December 31, 2008.

|                                    |   |              |  |              |           |              |   |           | 
|----------------------------------- | - | ------------ |  | ------------ | --------- | ------------ | - | --------- | 
|Income Statement for the year ended |   | Dec 31, 2008 |  | Dec 31, 2007 |           | Dec 31, 2006
|Total revenue                       | $ | 2,559,400    |  | $            | 2,247,300 |              | $ | 4,377,700
|Cost of goods sold                  |   | 556,400      |  |              | 519,300   |              |   | 456,200  
|Expenses                            |   | 2,127,500    |  |              | 2,088,500 |              |   | 2,709,200
|Net income (loss)                   |   | (31,100)     |  |              | (147,400) |              |   | 1,255,300
|- basic                             |   | (0.00)       |  |              | (0.01)    |              |   | 0.05     
|- diluted                           |   | n/a(1)       |  |              | n/a(1)    |              |   | 0.05     



Notes:

(1)

The diluted loss per share has not been computed, as the effect would be anti-dilutive.

|                                              |   |              |  |              |             |              |   |             | 
|--------------------------------------------- | - | ------------ |  | ------------ | ----------- | ------------ | - | ----------- | 
|Balance Sheet as at                           |   | Dec 31, 2008 |  | Dec 31, 2007 |             | Dec 31, 2006
|Cash and cash equivalents                     | $ | 2,106,000    |  | $            | 3,211,100   |              | $ | 3,515,200  
|Total assets                                  |   | 4,716,700    |  |              | 4,890,200   |              |   | 4,948,400  
|Total liabilities                             |   | 361,800      |  |              | 417,400     |              |   | 362,700    
|Cash dividend declared per share              |   |             |  |              |            |              |   |           
|Shareholders equity                          |   |              |  |              |             |              |   |            
|- Common shares                               |   | 8,261,400    |  |              | 8,303,100   |              |   | 8,299,600  
|- treasury shares                             |   | (51,600)     |  |              |            |              |   |           
|- paid-in capital for cancelled Common shares |   | 2,300        |  |              |            |              |   |           
|- paid-in capital options                     |   | 758,300      |  |              | 746,400     |              |   | 715,300    
|- deficit                                     |   | (4,615,600)  |  |              | (4,576,600) |              |   | (4.429.200)
|Total liabilities and shareholders equity     |   | 4,716,700    |  |              | 4,890,200   |              |   | 4,948,400  



LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $2,106,000 at December 31, 2008 as compared with $3,211,100 at December 31, 2007.

At December 31, 2008, the Company did not have any outstanding indebtedness.



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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 2008 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 2009, 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.

Contributing to this decrease in cash was:

·

Capital expenditures paid for in the amount of $529,500 (net of $10,000 cash received from the sale of assets) related to property, plant and equipment:

·

Building enhancement which were expensed in the year $8,600;

·

Capital expenditures of $11,400 related to patent filings;

·

Purchase for cancellation of capital stock in the amount of $100,500 pursuant to the Companys normal course issuer bid; and

·

Research and development costs of  $97,700 (non-exclusive of tax credits)

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 February 2008 with LMT Financial Inc. ("LMT") (a company beneficially owned by a director and his spouse) for, among other things, services to be provided for a one year period.  Compensation under the agreement has been recorded at $6,000 per month or $72,000 for the year ended December 31, 2008 (2007 - $72,000).  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, 2008, the Company issued 5,000 Common Shares to consultants for services provided in 2008.  As of the date of this report, the Company has 23,515,040 Common Shares issued and outstanding.

As of the date of this report, the Company had 105,000 Common Share options outstanding at an exercise price of $0.69 per option.

PURCHASES OF EQUITY SECURITIES

On April 1, 2008, the Company commenced a normal course issuer bid (the "NCIB") for its Common Shares. Pursuant to the terms of the NCIB, the Company may during the 12 month period commencing April 1, 2008 and ending March 31, 2009, purchase up to 1,191,127 Common Shares provided that the aggregate value of Common Shares so purchased, does not exceed $1,000,000.  Purchases of Common Shares will be made in open market transactions, at market prices prevailing at the time of acquisition.  Pursuant to the terms of the NCIB, during year ended December 31, 2008, the Company purchased 272,500 (2007 nil) of its Common Shares at an average purchase price of $0.36.  Of these Common Shares 125,000 Common Shares purchased under the NCIB had been cancelled as at December 31, 2008 and 147,500 are currently shown as treasury shares, to be cancelled.



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The total repurchase cost for these Common Shares for the year ended December 31, 2008 was $100,514. For the year ended December 31, 2008, $43,351 has been allocated to capital stock and $51,625 has been allocated to treasury shares, for the weighted average stated value of the shares in capital stock, $7,866 has been recorded to deficit for the amount in excess of the weighted average stated value and the remaining $2,329 has been recorded to paid-in capital for cancelled Common Shares for the amount below the weighted average stated value.

SIGNIFICANT CUSTOMERS

During the year ended December 31, 2008, the Company had two significant customers that represented 40% (one major wholesaler  28%; and one international customer - 12%) of product sales (2007  36% representing one major wholesaler).  The Company believes that its relationships with these customers are satisfactory.

OUTLOOK

As at March 27, 2009, the Company is debt free and had working capital of $2,850,000. 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.

RECENT ACCOUNTING PRONOUNCEMENTS

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

(i)

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 statement of operations. 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 has evaluated this pronouncement and has determined that there is no impact on its financial statements.

(ii)

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 SFAS No. 141(R) will have on its financial statements.

(iii)

In April 2008, the FASB issued SFAS No. 142-3, Determination of the Useful Life of Intangible Assets (SFAS 142-3). SFAS 142-3 requires entities, upon estimating the useful lives of recognized intangible assets, to consider historical experience in renewing or extending similar arrangements or, in the absence of historical experience, to consider assumptions that market-participants would use about renewal or extension. Market-participant assumptions used in the application of SFAS 142-3 should be consistent with SFAS 157s concept of highest and best use of the asset. SFAS 142-3 also enhances certain disclosure requirements of SFAS 142. SFAS 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the impact that SFAS No. 142-3 will have on its financial statements.



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ITEM 8.

FINANCIAL STATEMENTS

The financial statements of the Company for 2008 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 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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.

As at the end of 2008, management of the Company, with the participation of the Chief Executive Officer and the Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the Companys disclosure controls and procedures as required by United States and Canadian securities laws.  Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective as of the end of the period covered by this report.

Internal Control Over Financial Reporting

The Chief Executive Officer and the Chief Financial Officer of the Company are responsible for establishing and maintaining adequate internal control over financial reporting. The Companys internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Management conducted an evaluation of the effectiveness of its controls over financial reporting on a risk based approach using the elements of the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on our assessment and those criteria, our management concluded that our internal control over financial reporting was effective as of December 31, 2008.

This Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our managements report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only managements report in this Report.

ITEM 9B.

OTHER INFORMATION

Not applicable.

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.



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PART III



ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

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      |  | 63  |  | Director, President and Chief Executive Officer
|Arnold Tenney    |  | 66  |  | Chairman of the Board and Financial Advisor    
|John J. Kime     |  | 66  |  | Director                                       
|Robert H. Kayser |  | 66  |  | Director                                       
|John M. Gregory  |  | 56  |  | Director                                       
|Janice M. Clarke |  | 48  |  | 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. 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.

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



24



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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.

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 2008.

Code of Ethics

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



25



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ITEM 11.

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, 2008 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                    |  | 2008 |  | 183,333                       |  |                       |  |                           |  |                                   
|President & Chief              |  | 2007 |  | 175,000                       |  |                       |  |                           |  |                                   
|Executive Officer              |  | 2006 |  | 175,000                       |  |                       |  |                           |  |                                   



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 March 1, 2008, Mr. Riehls employment agreement provides for a gross annual remuneration of $185,000, 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 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.

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 1,874,452 of which 1,769,452 Common Shares remain available for option grants.



26



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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, 2008 (2007  0).

Compensation of Directors

In 2008, 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 2008.

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, 2008.

|            |  |                                       |  |                            |  |                                              |  |                                                                           
|----------- |  | ------------------------------------- |  | -------------------------- |  | -------------------------------------------- |  | --------------------------------------------------------------------------
|            |  | Securities 
Acquired on 
Exercise (#) |  | Value 
Realized ($)
(Cdn.) |  | Unexercised Options at
December 31, 2008 (#) |  | Value of Unexercised
In-the-Money Options at
December 31, 2007 
($) (Cdn.)
|Name        |  |                                       |  |                            |  | Exercisable/
Unexercisable                   |  | Exercisable/
Unexercisable                                                
|            |  |                                       |  |                            |  |                                              |  |                                                                           
|Peter Riehl |  |                                      |  |                           |  |                                             |  | $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 $23,760 for 2008 compared to $26,460 in 2007. The total amount of insurance purchased for the directors and officers as a group in 2008 and 2007 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.



27



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ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth, as at March 6, 2009, 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               |  | 3,474,741                                  | (1) | 14.8             | %
|Common Shares  |  | Arnold Tenney
31 Maple Avenue
Toronto, Ontario
Canada M4W 2T8          |  | 884,200                                    | (2) | 3.8              | %
|Common Shares  |  | John Kime
136 Hunt Club Drive
London, Ontario
Canada N6H 3Y7           |  | 125,000                                    |     | 0.5              | %
|Common Shares  |  | Janice Clarke
8664 Parkhouse Drive
Mt. Brydges, Ontario
Canada N0L 1W0 |  | 82,222                                     | (3) | 0.5              | %
|Common Shares  |  | John Gregory
340 Edgemont Ave
Suite 500
Bristol, Tennessee
U.S.A 37620 |  | 5,188,794                                  | (4) | 22.0             | %
|Common Shares  |  | All directors and executive officers
(5 individuals)                   |  | 9,784,957                                  | (5) | 42.2             | %



(1)

Includes (i) 1,690,714 Common Shares owned by Mr. Riehls wife.  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; and (iii) 85,000 Common Shares owned by Mr. Tenneys spouse.

(3)

Includes (i) 10,000 Common Shares owned by Ms. Clarkes spouse and (ii) currently exercisable options on 30,000 Common Shares granted under the Plan. See Item 10. Executive Compensation.  Stock Option Plan.

(4)

Common 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 Common Shares. Joan P. Gregory, Susan Gregory and James M. Gregory are deemed to be indirect beneficial owners of Common Shares due to their financial interest in SJ. SJ has the right of first refusal over shares owned by Peter Riehl and his spouse. See 12 (1) above.

(5)

Includes currently exercisable options on 30,000 Common Shares granted under the Plan. See Item 10. Executive Compensation.  Stock Option Plan.







28



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ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

In January 2008, Stellar entered into a consulting agreement with LMT Financial Inc., a company beneficially owned by a director and his spouse. This consulting agreement has a one year extension. 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 2008 (2007 - $72,000). This fee was satisfied in full through 12 monthly payments of $6,000 during 2008 (2007 - $6,000).

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

Our Audit Committee has appointed Deloitte & Touche LLP as our independent auditors for the fiscal years ending December 31, 2008 and 2007.

The following table shows the fees recorded by the Company  for the audit and other services provided by Deloitte & Touche LLP for 2008 and 2007:

|                               |  |      |         |  |      |   |         |  |  |  |  |  | 
|------------------------------ |  | ---- | ------- |  | ---- | - | ------- |  |  |  |  |  | 
|                               |  | 2008 |         |  | 2007 |  
|Audit Fees                     |  | $    | 87,400  |  |      | $ | 74,100  | 
|Audit-Related Fees             |  |      | 7,200   |  |      |   |       | 
|Quarterly Reviews & Other Fees |  |      | 46,000  |  |      |   | 31,100  | 
|Total                          |  | $    | 142,600 |  |      | $ | 105,200 | 



As defined by the Commission, (i) audit fees are fees for professional services rendered by our principal accountant for the audit of our annual financial statements and review of financial statements included in our Form 10-Q, or for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years; (ii) audit-related fees are fees for assurance and related services by our principal accountant that are reasonably related to the performance of the audit or review of our financial statements and are not reported under audit fees; (iii) tax fees are fees for professional services rendered by our principal accountant for tax compliance, tax advice, and tax planning; and (iv) all other fees are fees for products and services provided by our principal accountant, other than the services reported under audit fees, audit-related fees, and tax fees.

Audit Fees. Audit fees consist of fees recorded for professional services rendered for the audit of the Companys financial statements and services that are normally provided in connection with statutory and regulatory filings. The aggregate fees recorded by the Company for the 2008 and 2007 audit were approximately $87,400 and $74,100, respectively.

Audit-Related Fees.Audit related fees are fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Companys consolidated financial statements and are not under Audit Fees. Deloitte & Touche LLP billed $7,200 (2007 - $nil) for the year ended December 31, 2008 primarily in connection with review of the Company's responses to comment letters from the SEC.

All Other Fees.Fees related to the review of the interim financial statements included in quarterly reports and services that are normally provided in connection with statutory and regulatory filings.

Tax Fees. We do not engage our principal accountant to assist with the preparation or review of our annual tax filings. We do, however, engage an outside tax consultant to provide this service. The company did not have any tax filing fees in 2008.

Engagement of the Independent Auditor. The Audit Committee is responsible for approving every engagement of Deloitte & Touche LLP to perform audit or non-audit services for us before Deloitte & Touche LLP is engaged to provide those services. Under applicable Commission rules, the Audit Committee is required to pre-approve the audit and non-audit services performed by the independent auditors in order to ensure that they do not impair the auditors independence. The Commissions rules specify the types of non-audit services that an independent auditor may not provide to its audit client and establish the Audit Committees responsibility for administration of the engagement of the independent auditors.

Consistent with the Commissions rules, the Audit Committee Charter requires that the Audit Committee review and pre-approve all audit services and permitted non-audit services provided by the independent auditors to us or any of our subsidiaries. The Audit Committee may delegate pre-approval authority to a member of the Audit Committee and if it does, the decisions of that member must be presented to the full Audit Committee at its next scheduled meeting.



29



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The Audit Committees pre-approval policy provides as follows:

·

First, once a year when the base audit engagement is reviewed and approved, management will identify all other services (including fee ranges) for which management knows it will engage Deloitte & Touche LLP for the next 12 months. Those services typically include quarterly reviews, specified tax matters, certifications to the lenders as required by financing documents, consultation on new accounting and disclosure standards and, in future years, reporting on managements internal controls assessment.

·

Second, if any new unlisted proposed engagement arises during the year, the engagement will require approval of the Audit Committee.

ITEM 15.

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                                                                          |  | ****                  



*

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



30



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****

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, 2008  1st Qtr 2008 Financial Results

Filed August 14, 2008  2nd Qtr 2008 Financial Results

Filed November 14, 2008  3rd Qtr 2008 Financial Results



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: April 9, 2009 | 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: April 9, 2009 | By:                           | /s/ Arnold Tenney
|                    | Name: Arnold Tenney          
|                    | Title:  Chairman of the Board



|                    |                                 |                
|------------------- | ------------------------------- | ---------------
|                    |                                
|                    |                                 |                
|Date: April 9, 2009 | By:                             | /s/ Peter Riehl
|                    | Name: Peter Riehl              
|                    | Title:  Chief Executive Officer



|                    |                                |                     
|------------------- | ------------------------------ | --------------------
|                    |                               
|                    |                                |                     
|Date: April 9, 2009 | By:                            | /s/ Robert H. Kayser
|                    | Name: Robert H. Kayser        
|                    | Title:  Secretary and Director



|                    |                    |                 
|------------------- | ------------------ | ----------------
|                    |                   
|                    |                    |                 
|Date: April 9, 2009 | By:                | /s/ John J. Kime
|                    | Name: John J. Kime
|                    | Title:  Director  



|                    |                       |                    
|------------------- | --------------------- | -------------------
|                    |                      
|                    |                       |                    
|Date: April 9, 2009 | By:                   | /s/ John M. Gregory
|                    | Name: John M. Gregory
|                    | Title:  Director     



|                    |                                 |                     
|------------------- | ------------------------------- | --------------------
|                    |                                
|                    |                                 |                     
|Date: April 9, 2009 | 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, 2008 AND 2007









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STELLAR PHARMACEUTICALS INC.







DECEMBER 31, 2008



(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 LOSS        | F-4   
|STATEMENTS OF CASH FLOWS                               | F-5   
|NOTES TO FINANCIAL STATEMENTS                          | F-6-20









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|                    |                                                                           
|------------------- | --------------------------------------------------------------------------
|[stellar10k002.gif] | Deloitte & Touche LLP
1 Concorde Gate
Suite 200
Toronto ON  M3C 4G4
Canada
|                    | Tel: 416-601-6150
Fax: 416-601-6151
www.deloitte.ca                       



Report of Independent Registered Chartered Accountants



To the Board of Directors and Shareholders of

Stellar Pharmaceuticals Inc.



We have audited the accompanying balance sheets of Stellar Pharmaceuticals Inc. (the "Company") as of December 31, 2008 and 2007, and the related statements of operations and comprehensive loss, changes in shareholders' equity, and cash flows for each of the two years in the period ended December 31, 2008.  These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with 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 audits 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 audits provide a reasonable basis for our opinion.



In our opinion, such financial statements present fairly, in all material respects, the financial position of Stellar Pharmaceuticals Inc. at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.



[stellar10k004.gif]



Independent Registered Chartered Accountants

Licensed Public Accountants

April 6, 2009



F-1



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STELLAR PHARMACEUTICALS INC.

BALANCE SHEETS

(Expressed in Canadian dollars)

December 31



|                                        |                                                             |                                                        |                                    |             |           |           |             |          
|--------------------------------------- | ----------------------------------------------------------- | ------------------------------------------------------ | ---------------------------------- | ----------- | --------- | --------- | ----------- | ---------
|ASSETS                                  | 2008                                                        |                                                        | 2007                              
|CURRENT                                 |                                                             |                                                        |                                    |             |           |           |            
|                                        | Cash and cash equivalents (Note 3)                          | $                                                      | 2,105,966                          |             | $         | 3,211,126
|                                        | Accounts receivable, net of allowance of $nil (2007 - $nil) |                                                        | 549,055                            |             |           | 272,341  
|                                        | Inventories (Note 4)                                        |                                                        | 364,551                            |             |           | 305,040  
|                                        | Taxes recoverable                                           |                                                        | 212,445                            |             |           | 164,714  
|                                        | Loan receivable (Note 8)                                    |                                                        | 18,369                             |             |           |         
|                                        | Prepaids, deposits and sundry receivables (Note 5)          |                                                        | 130,515                            |             |           | 44,066   
|                                        |                                                             |                                                        |                                    |             | 3,380,901 |           |             | 3,997,287
|PROPERTY, PLANT AND EQUIPMENT(Note 6)   |                                                             | 1,270,257                                              |                                    |             | 822,692  
|OTHER ASSETS(Note 7)                    |                                                             | 65,495                                                 |                                    |             | 55,430   
|LOAN RECEIVABLE(Note 8)                 |                                                             |                                                       |                                    |             | 14,822   
|                                        |                                                             |                                                        |                                    | $           | 4,716,653 |           | $           | 4,890,231
|LIABILITIES                             |                                                             |                                                        |                                    |             |          
|CURRENT                                 |                                                             |                                                        |                                    |             |           |           |            
|                                        | Accounts payable                                            | $                                                      | 173,812                            |             | $         | 214,442  
|                                        | Accrued liabilities                                         |                                                        | 186,201                            |             |           | 192,364  
|                                        | Deferred revenues                                           |                                                        | 1,749                              |             |           | 10,573   
|                                        |                                                             |                                                        |                                    |             | 361,762   |           |             | 417,379  
|CONTINGENCIES AND COMMITMENTS (Note 13) |                                                             |                                                        |                                    |             |          
|                                        |                                                             |                                                        |                                    |             |          
|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)                                             |                                                        |                                    |             |           |          
|                                        | 23,702,540                                                  | Common shares (2007  23,822,540)                      |                                    | 8,261,403   |           |           | 8,303,054  
|                                        | (147,500)                                                   | Treasury shares                                        |                                    | (51,625)    |           |           |           
|                                        |                                                             | Additional Paid-in capital for cancelled Common shares |                                    | 2,329       |           |           |          
|                                        |                                                             | Additional Paid-in capital options (Note 9 (c))        |                                    | 758,337     |           |           | 746,419    
|                                        |                                                             |                                                        |                                    |             | 8,970,444 |           |             | 9,049,473
|DEFICIT                                 |                                                             |                                                        |                                    | (4,615,553) |           |           | (4,576,621)
|                                        |                                                             |                                                        |                                    |             | 4,354,891 |           |             | 4,472,852
|                                        |                                                             |                                                        |                                    | $           | 4,716,653 |           | $           | 4,890,231



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

/s/Arnold Tenney                                      .
|Director
Director                                                      



F-2



---





STELLAR PHARMACEUTICALS INC.

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

(Expressed in Canadian dollars)

FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

|                                                              |  |                 |            |                   |  |                 |  |                   |           |                                |  |                                    |  |                     |       |           |  |           |  |  |         |  |  |             | 
|------------------------------------------------------------- |  | --------------- | ---------- | ----------------- |  | --------------- |  | ----------------- | --------- | ------------------------------ |  | ---------------------------------- |  | ------------------- | ----- | --------- |  | --------- |  |  | ------- |  |  | ----------- | 
|                                                              |  | Number of       |            |                   |  |                 |  |                   |           | Additional
Paid in
Capital for |  | Additional Paid in
Capital Options |  |                     |      
|                                                              |  | Common
Shares
# |            | Treasury
Shares
# |  | Common Shares
$ |  | Treasury
Shares
$ |           | Cancelled
Shares
$             |  | Options
Outstanding
$              |  | Options
Exercised
$ |       | Deficit
$ | 
|                                                              |  |                 |            |                   |  |                 |  |                   |           |                                |  |                                    |  |                     |       |           |  |           |  |  |         |  |  |             | 
|BALANCE,                                                      |  |                 |            |                   |  |                 |  |                   |           |                                |  |                                    |  |                     |       |           |  |           |  |  |         |  |  |             | 
|January 1, 2007                                               |  |                 | 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) | 
|                                                              |  |                 |            |                   |  |                 |  |                   |           |                                |  |                                    |  |                     |       |           |  |           |  |  |         |  |  |             | 
|Shares issued for services                                    |  |                 | 5,000      |                   |  |                |  |                   | 1,700     |                                |  |                                   |  |                     |      |           |  |          |  |  |        |  |  |            | 
|                                                              |  |                 |            |                   |  |                 |  |                   |           |                                |  |                                    |  |                     |       |           |  |           |  |  |         |  |  |             | 
|Options issued to employees                                   |  |                 |           |                   |  |                |  |                   |          |                                |  |                                   |  |                     |      |           |  | 11,918    |  |  |        |  |  |            | 
|                                                              |  |                 |            |                   |  |                 |  |                   |           |                                |  |                                    |  |                     |       |           |  |           |  |  |         |  |  |             | 
|Employees options expired                                     |  |                 |           |                   |  |                |  |                   |          |                                |  |                                   |  |                     |      |           |  | (98,955)  |  |  | 98,955  |  |  |            | 
|                                                              |  |                 |            |                   |  |                 |  |                   |           |                                |  |                                    |  |                     |       |           |  |           |  |  |         |  |  |             | 
|Purchase of Shares under normal course issuer bid
(Note 9(c)) |  |                 | (125,000)  |                   |  |                |  |                   | (43,351)  |                                |  |                                   |  |                     | 2,329 |           |  |          |  |  |        |  |  | (7,866)     | 
|                                                              |  |                 |            |                   |  |                 |  |                   |           |                                |  |                                    |  |                     |       |           |  |           |  |  |         |  |  |             | 
|Treasury Shares                                               |  |                 |           |                   |  | (147,500)       |  |                   |          |                                |  | (51,625)                           |  |                     |      |           |  |          |  |  |        |  |  |            | 
|                                                              |  |                 |            |                   |  |                 |  |                   |           |                                |  |                                    |  |                     |       |           |  |           |  |  |         |  |  |             | 
|Net loss for the year                                         |  |                 |           |                   |  |                |  |                   |          |                                |  |                                   |  |                     |      |           |  |          |  |  |        |  |  | (31,066)    | 
|                                                              |  |                 |            |                   |  |                 |  |                   |           |                                |  |                                    |  |                     |       |           |  |           |  |  |         |  |  |             | 
|BALANCE,                                                      |  |                 |            |                   |  |                 |  |                   |           |                                |  |                                    |  |                     |       |           |  |           |  |  |         |  |  |             | 
|December 31, 2008                                             |  |                 | 23,702,540 |                   |  | (147,500)       |  |                   | 8,261,403 |                                |  | (51,625)                           |  |                     | 2,329 |           |  | 35,965    |  |  | 722,372 |  |  | (4,615,553) | 



See accompanying notes to financial statements.



F-3



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STELLAR PHARMACEUTICALS INC.

STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Expressed in Canadian dollars)

FOR THE YEARS ENDED DECEMBER 31

|                                                                         |      |            |      |   |           
|------------------------------------------------------------------------ | ---- | ---------- | ---- | - | ----------
|                                                                         | 2008 |            | 2007
|                                                                         |      |            |      |   | (Note 19) 
|PRODUCT SALES                                                            | $    | 2,118,282  |      | $ | 1,664,595 
|COST OF PRODUCTS SOLD                                                    |      | 556,401    |      |   | 519,291   
|MARGIN ON PRODUCTS SOLD                                                  |      | 1,561,881  |      |   | 1,145,304 
|ROYALTIES & LICENSING REVENUE                                            |      | 441,130    |      |   | 582,670   
|GROSS PROFIT                                                             |      | 2,003,011  |      |   | 1,727,974 
|EXPENSES                                                                 |      |            |      |   |           
|Selling, general and administrative *                                    |      | 2,010,383  |      |   | 2,090,517 
|Research and development (Note 2 (k))                                    |      | 62,727     |      |   | (55,268)  
|Amortization of assets (non-manufacturing property, plant and equipment) |      | 54,384     |      |   | 53,213    
|                                                                         |      | 2,127,494  |      |   | 2,088,462 
|LOSS FROM OPERATIONS                                                     |      | (124,483)  |      |   | (360,488) 
|INTEREST AND OTHER INCOME                                                |      | 83,741     |      |   | 213,047   
|GAIN ON DISPOSAL OF EQUIPMENT                                            |      | 9,676      |      |   |          
|NET LOSS AND COMPREHENSIIVE LOSS FOR THE YEAR                            |      | (31,066)   |      |   | (147,441) 
|INCOME TAXES(Note 10)                                                    |      |           |      |   |          
|NET LOSS AND COMPREHENSIVE LOSS                                          | $    | (31,066)   |      | $ | (147,441) 
|LOSS PER SHARE(Note 11)                             - Basic              | $    | 0.00       |      | $ | (0.01)    
|- Diluted                                                                | $    |           |      | $ |          
|WEIGHTED AVERAGE NUMBER OF COMMON                                        |      |            |      |   |           
|SHARES  OUTSTANDING- Basic                                               |      | 23,801,450 |      |   | 23,821,562
|- Diluted                                                                |      | 23,801,450 |      |   | 23,821,562
|                                                                         |      |            |      |   |           
|See accompanying notes to financial statements.                         



* Included in selling, general and administrative expenses is $72,000 in related party transactions (Note 14)



F-4



---





STELLAR PHARMACEUTICALS INC.

STATEMENTS OF CASH FLOWS

(Expressed in Canadian dollars)

FOR THE YEARS ENDED DECEMBER 31

|                                                                          |      |             |      |   |          
|------------------------------------------------------------------------- | ---- | ----------- | ---- | - | ---------
|                                                                          | 2008 |             | 2007
|CASH FLOWS USED IN OPERATING ACTIVITIES                                   |      |             |      |   |          
|Net loss                                                                  | $    | (31,066)    |      | $ | (147,441)
|Items not affecting cash                                                  |      |             |      |   |          
|Amortization                                                              |      | 126,556     |      |   | 146,847  
|Gain on disposal of equipment                                             |      | (9,676)     |      |   |         
|Write-down of property, plant & equipment                                 |      | 2,656       |      |   |         
|Unrealized foreign exchange (gain) loss                                   |      | (17,945)    |      |   | 849      
|Issuance of equity instruments for services rendered (Note 9 (a) & 9 (d)) |      | 13,618      |      |   | 34,607   
|Change in non-cash operating assets and liabilities (Note 12)             |      | (562,256)   |      |   | (202,643)
|CASH FLOWS USED IN OPERATING ACTIVITIES                                   |      | (478,113)   |      |   | (167,781)
|                                                                          |      |             |      |   |          
|CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES                     |      |             |      |   |          
|Additions to property, plant and equipment                                |      | (539,511)   |      |   | (114,369)
|Increase in other assets                                                  |      | (11,420)    |      |   | (7,095)  
|Proceeds from sale of equipment                                           |      | 10,000      |      |   |          
|Loan receivable                                                           |      |           |      |   | (14,822) 
|CASH FLOWS USED IN INVESTING ACTIVITIES                                   |      | (540,931)   |      |   | (136,286)
|                                                                          |      |             |      |   |          
|CASH FLOWS USED IN FINANCING ACTIVITIES                                   |      |             |      |   |          
|Repurchase of common shares for cash (Note 9(c))                          |      | (100,514)   |      |   |         
|CASH FLOWS USED IN FINANCING ACTIVITIES                                   |      | (100,514)   |      |   |         
|                                                                          |      |             |      |   |          
|EFFECT OF EXCHANGE RATES ON CASH HELD IN
FOREIGN CURRENCY                 |      | 14,398      |      |   | 16,575   
|CHANGE IN CASH AND CASH EQUIVALENTS                                       |      | (1,105,160) |      |   | (287,492)
|                                                                          |      |             |      |   |          
|CASH AND CASH EQUIVALENTS, beginning of year                              |      | 3,211,126   |      |   | 3,515,193
|CASH AND CASH EQUIVALENTS, end of year                                    | $    | 2,105,966   |      | $ | 3,211,126



See accompanying notes to financial statements.





F-5



---





STELLAR PHARMACEUTICALS INC.

NOTES TO FINANCIAL STATEMENTS

(Expressed in Canadian dollars)

DECEMBER 31, 2008 AND 2007

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. 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.  Cash and cash equivalents are held with two major financial institutions 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 Financial Accounting Standards Board ("FASB")  Emerging Task Force ("EITF") Issue No. 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 collectibility is reasonably assured.  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 collectibility 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 upon delivery of the methods and technical know-how.

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 material future obligation, other than inconsequential and prefunctory support, as would be expected under such agreements and the amount of the royalty fee is determinable and collection is reasonably assured.



F-6



---





2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(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.   Cost is determined to be purchased cost for raw materials and the production cost (materials, labor and indirect manufacturing cost) for work-in-process and finished goods. Throughout the manufacturing process, the related production costs are recorded within inventory.

(e)

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost.  The Company periodically evaluate whether current facts or circumstances indicate that the carrying value of such assets to be held and used may not be recoverable.The Company reviews its long-lived assets, such as fixed assets to be held and used or disposed of, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected undiscounted cash flows undiscounted and without interest is less than the carrying amount of the asset, an impairment loss is recognized in the amount by which the carrying amount of the asset exceeds its fair value.  The basis and estimated useful lives of these assets are provided for as follows:



|                              |  |                                |  |              
|----------------------------- |  | ------------------------------ |  | -------------
|Asset Classification          |  | Amortization Method            |  | Useful Life  
|Building                      |  | Straight-line                  |  | 20 years     
|Computer and office equipment |  | Straight-line                  |  | 5 years      
|Manufacturing equipment       |  | Straight-line & Activity based |  | 5 to 10 years
|Warehouse equipment           |  | Straight-line                  |  | 5 to 10 years
|Packaging equipment           |  | Activity based                 |  | 5 to 10 years

Activity based amortization is based on the number of uses for each asset in that category.

(f)

OTHER ASSETS

Amortization of other assets is being provided for on a straight-line basis as noted below:

|                     |  |                     |  |            
|-------------------- |  | ------------------- |  | -----------
|Asset Classification |  | Amortization Method |  | Useful Life
|Patents              |  | Straight-line       |  | 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, 2008 and 2007, 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 bases its estimates on historical experiences and on various other assumptions believed to be reasonable under the circumstances.  Actual results could differ from those estimates.  As adjustments become necessary, they are recorded in earnings in the period in which they become known.

(h)

CHANGE IN ESTIMATES

In 2008, a change was made in manufacturers and thereby a change in the equipment utilized in the process.   The Company performed an assessment in the last quarter of 2008, based on the Companys experience of the expected utilization of manufacturing equipment; the expected utilization period is estimated to be amortized over a period of up to 10 years.  This change was determined to be a change in estimates not a change in accounting policy. The change in estimate is accounted for prospectively, with



F-7



---





2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(h)

CHANGE IN ESTIMATES (continued)

the remaining net carrying value of the manufacturing equipment still being utilized in the manufacturing process being depreciated over the remaining useful life.  The impact on the change in estimate for the current year is not significant.

(i)

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.  The Company records net deferred tax assets to the extent, management believes 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.

(j)

STOCK-BASED COMPENSATION

The Company uses fair value based method of accounting for all its stock-based compensation in accordance with FASB Statement of Financial Accounting Standards Board ("SFAS") No. 123 (R). Share-based Payment ((SFAS 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, 2008 and 2007 was $11,918 and $31,107, respectively (Note 9(d)).

(j)

FOREIGN CURRENCY TRANSACTIONS AND 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



---





2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

(k)

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 $34,926 (2007 - $158,022) to research and development for prior years tax credits, which has now been assessed and approved.

(l)

COMPREHENSIVE INCOME

SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), establishes standards for the reporting and display of comprehensive income and its components..

(m)

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 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 (105,000 shares at December 31, 2008, and 355,000 shares at December 31, 2007) would be a decrease to the basic loss per share. Therefore, diluted loss per share is not presented when the effect is anti-dilutive.

(n)

FAIR VALUE

Effective January 1, 2008, the Company adopted SFAS Statement No. 157, Fair Value Measurements (SFAS 157).  SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures regarding fair value measurements.  SFAS 157 defines fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  SFAS 157 provides guidance on how to measure the fair value of financial instruments according to a fair value hierarchy that prioritizes the information used to measure fair value into three broad levels.  SFAS 157 broadly applies to most existing pronouncements that require or permit fair value measurements (including both financial and non-financial assets and liabilities) but does not require any new fair value measurements.

The adoption of SFAS 157 did not have a material impact on the Companys shareholders equity and net loss and comprehensive loss for the period.

In February 2008, the FASB issued Financial Staff Position ("FSP") SFAS 157-2 Effective Date of FASB Statement No. 157 (FSP SFAS 157-2), which permits a one-year deferral of the application of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis.  The Company will adopt SFAS 157 for non-financial assets and non-financial liabilities on January 1, 2009 and is currently evaluating the impact of this adoption on its shareholders equity and net loss and comprehensive loss.

(o)

FAIR VALUE OPTION

Effective January 1, 2008, the Company adopted SFAS No. 159,  ′′The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (SFAS 159).  SFAS 159 allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value.  Following the election of the fair value option for an eligible item, changes in the items fair value in subsequent reporting periods must be recognized as earnings.  SFAS 159 also establishes presentation and disclosure requirements designed to draw comparisons between entities that elect different measurement attributes for similar assets and liabilities.



F-9



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2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The adoption of SFAS 159 did not have an impact on the Companys shareholders equity and net loss and comprehensive loss.

(p)

RECENT ACCOUNTING PRONOUNCEMENTS

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

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51. SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling 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 statement of operations. SFAS No. 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS No. 160 is effective for fiscal years, and interim periods beginning after January 1, 2009. The Company has evaluated this pronouncement and has determined that there is no impact on its financial statements.

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 noncontrolling 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 has evaluated this pronouncement and has determined that there is no impact on its financial statements.

In April 2008, the FASB issued SFAS No. 142-3, Determination of the Useful Life of Intangible Assets (SFAS 142-3). SFAS 142-3 requires entities, upon estimating the useful lives of recognized intangible assets, to consider historical experience in renewing or extending similar arrangements or, in the absence of historical experience, to consider assumptions that market-participants would use about renewal or extension. Market-participant assumptions used in the application of SFAS 142-3 should be consistent with SFAS 157s concept of highest and best use of the asset. SFAS 142-3 also enhances certain disclosure requirements of SFAS 142. SFAS 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and is applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited.

3.

CASH AND CASH EQUIVALENTS

|                       |              |           |      |   |          
|---------------------- | ------------ | --------- | ---- | - | ---------
|Consists of -          | December 31,
|                       | 2008         |           | 2007
|Cash                   | $            | 1,205,094 |      | $ | 579,906  
|Short-term investments |              | 900,872   |      |   | 2,631,220
|                       | $            | 2,105,966 |      | $ | 3,211,126

4.

INVENTORIES

|                    |              |         |      |   |        
|------------------- | ------------ | ------- | ---- | - | -------
|Consists of -       | December 31,
|                    | 2008         |         | 2007
|Raw material        | $            | 135,315 |      | $ | 111,752
|Finished goods      |              | 38,842  |      |   | 17,652 
|Packaging materials |              | 53,811  |      |   | 39,356 
|Work in process     |              | 136,583 |      |   | 136,280
|                    | $            | 364,551 |      | $ | 305,040





F-10



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5.

PREPAIDS, DEPOSITS AND SUNDRY RECEIVABLES

|                                   |              |         |      |   |       
|---------------------------------- | ------------ | ------- | ---- | - | ------
|Consists of -                      | December 31,
|                                   | 2008         |         | 2007
|Prepaid operating expenses         | $            | 37,312  |      | $ | 18,425
|Deposit on manufactured goods*     |              | 91,120  |      |   | 14,065
|Interest receivable on investments |              | 2,083   |      |   | 11,576
|                                   | $            | 130,515 |      | $ | 44,066

*

Deposit on manufactured goods relates to a deposit required upon the issuance of the order for a manufacturing process to occur.  The Company has submitted a deposit for manufacturing which will not occur until January 2009.

6.

PROPERTY, PLANT AND EQUIPMENT

|                        |                   |           |                          |   |                     |  |   |          
|----------------------- | ----------------- | --------- | ------------------------ | - | ------------------- |  | - | ---------
|Consists of -           | December 31, 2008
|                        | Cost              |           | Accumulated
Amortization |   | Net Carrying
Amount
|Land                    | $                 | 90,000    |                          | $ |                    |  | $ | 90,000   
|Building                |                   | 586,954   |                          |   | 116,105             |  |   | 470,849  
|Office equipment        |                   | 40,495    |                          |   | 36,801              |  |   | 3,694    
|Manufacturing equipment |                   | 1,099,790 |                          |   | 475,453             |  |   | 624,337  
|Warehouse equipment     |                   | 13,750    |                          |   | 3,675               |  |   | 10,075   
|Packaging equipment     |                   | 48,467    |                          |   | 5,840               |  |   | 42,627   
|Computer equipment      |                   | 116,735   |                          |   | 88,060              |  |   | 28,675   
|                        | $                 | 1,996,191 |                          | $ | 725,934             |  | $ | 1,270,257

The Company performed an analysis of its property, plant and equipment and based on this analysis determined that $30,308 of its manufacturing equipment was no longer useable. The Company removed $30,308 in assets from manufacturing equipment and recorded a reduction to accumulated amortization of $27,652 and $2,656 to operations as a part of selling, general and administrative expenses.

|                        |                   |           |                          |   |                     |  |   |        
|----------------------- | ----------------- | --------- | ------------------------ | - | ------------------- |  | - | -------
|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 |                   | 587,751   |                          |   | 466,855             |  |   | 120,896
|Warehouse equipment     |                   | 12,935    |                          |   | 1,007               |  |   | 11,928 
|Packaging equipment     |                   | 47,748    |                          |   | 2,414               |  |   | 45,334 
|Computer equipment      |                   | 116,735   |                          |   | 69,778              |  |   | 46,957 
|                        | $                 | 1,482,618 |                          | $ | 659,926             |  | $ | 822,692



7.

OTHER ASSETS



|              |                   |        |                          |   |                     |  |   |       
|------------- | ----------------- | ------ | ------------------------ | - | ------------------- |  | - | ------
|Consists of - | December 31, 2008
|              | Cost              |        | Accumulated
Amortization |   | Net Carrying
Amount
|Patents       | $                 | 72,380 |                          | $ | 6,885               |  | $ | 65,495

Over the next five years the Company will record amortization expense of $1,355 for each of those years.  The Company currently has capital assets of $49,794 which are not being amortized as these patents are currently pending.



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





F-11



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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$18,369).  The note matures on April 23, 2009 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 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, 2008                |  |  | 23,822,540    |  | $      | 8,303,054
|Shares purchased in buyback (cancelled) |  |  | (125,000)     |  |        | (43,351) 
|Shares issued to consultants            |  |  | 5,000         |  |        | 1,700    
|Balance, December 31, 2008              |  |  | 23,702,540    |  | $      | 8,261,403



Treasury Shares



|                           |  |  |               |  |        |         
|-------------------------- |  |  | ------------- |  | ------ | --------
|                           |  |  | #  of  Shares |  | Amount
|Balance, January 1, 2008   |  |  |              |  | $      |        
|Treasury shares            |  |  | (147,500)     |  |        | (51,625)
|Balance, December 31, 2008 |  |  | (147,500)     |  | $      | (51,625)



(b)

Shares to be Issued

During 2008, 5,000 Common Shares  (2007  3,500) were issued to satisfy in full, a debt for consulting services which were rendered and expensed in 2008 with a value of $1,700 (2007 - $3,500). Subsequent to the year ended 2008, there were no Common Shares outstanding to be issued.

(c)

Purchases of Equity Securities

On April 1, 2008, the Company commenced a normal course issuer bid (the "NCIB") for its Common Shares. Pursuant to the terms of the NCIB, the Company may during the 12 month period commencing April 1, 2008 and ending March 31, 2009, purchase up to 1,191,127 Common Shares provided that the aggregate value of Common Shares so purchased, does not exceed $1,000,000.  Purchases of Common Shares will be made in open market transactions, at market prices prevailing at the time of acquisition.  For the year ended December 31, 2008, 125,000 Common Shares (2007  nil) purchased under the NCIB had been cancelled and 147,500 were recorded as Treasury Shares, to be cancelled.

Pursuant to the terms of the NCIB, during the year ended December 31, 2008, the Company purchased 272,500, of its Common Shares at an average purchase price of $0.36.  The total repurchase cost for these Common Shares for the year ended December 31, 2008 was $100,514. For the year ended December 31, 2008, 125,000 Common Shares for $43,351, paid and cancelled Common Shares, has been allocated to capital stock, while 147,500 Common Shares for $51,625 of paid but not cancelled Common Shares,  has been allocated to treasury shares, for the weighted average stated value of the shares in capital stock, $7,866 has been recorded to deficit for the amount in excess of the weighted average stated value and the remaining ($2,329) has been recorded to paid-in capital for cancelled Common Shares for the amount below the weighted average stated value.



F-12



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9.

CAPITAL STOCK (continued)

(d)

Paid-in Capital Options

Paid-in Capital Options  Outstanding

The activities in the paid-in capital options are as follows:

|                                                              |        |         
|------------------------------------------------------------- | ------ | --------
|                                                              | Amount
|Balance, January 1, 2008                                      | $      | 123,002 
|Expense recognized for options issued to employees/ directors |        | 11,918  
|Options issued to employees/directors expired                 |        | (98,955)
|Balance, December 31, 2008                                    | $      | 35,965  



Paid in Capital Options  Expired

|                                    |        |        
|----------------------------------- | ------ | -------
|                                    | Amount
|Balance, January 1, 2008            | $      | 623,417
|Options issued to employees expired |        | 98,955 
|Balance, December 31, 2008          | $      | 722,372

(e)

Stock Options

The Companys stock based compensation program includes stock options in which some options vest based on continuous service while others vest based on performance conditions, such as profitability and sales goals.  For those equity awards that vest based on continuous service, compensation expense is recorded over the service period from the date of grant.  For performance-based awards, compensation expense is recorded over the remaining service period when management determines that achievement is probable.

During the year ended December 31, 2008, there were 115,000 options granted (2007  140,000). These options were to vest one half on March 31, 2009 and the remaining one half on October 31, 2009, upon achieving certain financial objectives.  As at December 31, 2008, the financial objectives related to these options were not met for the specified period and, therefore, the related performance based awards will not vest.

Since share based compensation under SFAS No. 123R is recognized only for those awards that are ultimately expected to vest, the Company has applied an estimated forfeiture rate (based on historical experience and projected employee turnover) to unvested awards for the purpose of calculating compensation expense.  For the year ended December 31, 2008, the Company recorded $11,918 (2007  $31,107) as compensation expense for options issued to directors, officers and employees based on continuous service.  This expense was recorded as selling, general and administrative.  The total number of options outstanding as at December 31, 2008 was 105,000 (2007  355,000).

The weighted average grant date fair value of options was $0.21and $0.35 for options granted during the years ended December 31, 2008 and 2007, respectively.

The Company uses the Black-Scholes option-pricing model to estimate fair value of grants of stock options with the following weighted average 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, 2008 and 2007 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



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9.

CAPITAL STOCK (continued)

The following table presents information relating to stock options outstanding and exercisable at December 31, 2008.

|                        |  |                    |  |                                             |  |   |                                 |  |                                         |  |   |                                
|----------------------- |  | ------------------ |  | ------------------------------------------- |  | - | ------------------------------- |  | --------------------------------------- |  | - | -------------------------------
|Range of
Exercise Price |  | Number
Outstanding |  | Weighted
Average Remaining Contractual
Life |  |   | Weighted
Average
Exercise Price |  | Number
Exercisable at
December 31,
2008 |  |   | Weighted Average
Exercise
Price
|$0.69                   |  | 105,000            |  | 1.5 years                                   |  | $ | 0.69                            |  | 105,000                                 |  | $ | 0.69                           

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 activities in options outstanding are as noted below:

|                           |           |  |   |                                
|-------------------------- | --------- |  | - | -------------------------------
|                           | Options   |  |   | Weighted
Average
Exercise
Price
|Balance, January 1, 2008   | 355,000   |  | $ | 1.09                           
|Granted                    | 115,000   |  |   | 0.50                           
|Cancelled                  | (115,000) |  |   | 0.50                           
|Forfeited                  | (250,000) |  |   | 1.26                           
|Balance, December 31, 2008 | 105,000   |  | $ | 0.69                           



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.

As at December 31, 2008, all options had fully vested.  As at December 31 2007, the number of unvested options  expected to vest (including the impact of expected forfeitures as required under SFAS 123R) had been estimated at 62,943, with a weighted average contractual life of 3 years and exercise price of $0.69.  In April 2008, the Company had granted 115,000 options to its employees, which were cancelled due to certain financial objectives not being met by the end year.  As at December 31, 2008, compensation costs of $11,918 had been recognized and expensed in the year for options which vested during the period (2007 - $31,107).

10.

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:                         | 2008 |          | 2007
|Income tax expense (recovery) at statutory rate at 33.5% (36.12%)      | $    | (10,400) |      | $ | (53,300)
|Adjusted for:                                                          |      |          |      |   |         
|Benefits (expense) realized from loss carried forward                  |      |         |      |   |        
|Impact on legislated changes in rates of reversal on current year loss |      | 1,300    |      |   |        
|Valuation allowance                                                    |      | (2,100)  |      |   | 39,100  
|Non-deductible expenses                                                |      | 6,000    |      |   | 14,200  
|Deferred tax liability for non-deductible tax credits                  |      | 3,300    |      |   |        
|Other                                                                  |      | 1,900    |      |   |        
|                                                                       | $    |         |      | $ |        







F-14



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10.

INCOME TAXES (continued)

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:

|                                                                                   |      |             |      |   |             |  |  | 
|---------------------------------------------------------------------------------- | ---- | ----------- | ---- | - | ----------- |  |  | 
|                                                                                   | 2008 |             | 2007
|Benefit of net operating losses carry-forward                                      | $    | 627,700     |      | $ | 614,200    
|Book values of property and equipment and intangible assets in excess of tax bases |      | (16,200)    |      |   | 13,600     
|Benefit of SR&ED expenditures                                                      |      | 545,100     |      |   | 527,600    
|Deferred tax liability for non-refundable tax credits                              |      | (97,200)    |      |   | (93,900)   
|Valuation allowance                                                                |      | (1,059,400) |      |   | (1,061,500)
|                                                                                   | $    |            |      | $ |           

The valuation allowance was provided against the net deferred tax assets at December 31, 2008 and 2007, because the realization of the asset remains not determinable.

The Company has non-capital losses carry-forward for income tax purposes in the amount of $2,164,600 which may be applied against future years taxable income. The losses expire as follows:



|     |   |          
|---- | - | ---------
|2010 | $ | 159,600  
|2014 |   | 780,800  
|2015 |   | 1,177,300
|2028 |   | 46,900   
|     | $ | 2,164,600



Tax years 2003 through 2008 remain open to examination by the taxing jurisdictions to which we are subject. The 2007 and 2008 tax years are currently being prepared for filing.  The Company has not been notified by any taxing jurisdictions of any proposed or planned examination.

The non-refundable portion of the tax credits as at December 31, 2008 was $335,000.  The tax credits have a full valuation allowance on them as they do not meet the more likely than not test.  The non-refundable tax credit details are as follows:



|     |   |        
|---- | - | -------
|2004 | $ | 144,700
|2005 |   | 127,500
|2006 |   | 45,200 
|2007 |   | 6,500  
|2008 |   | 11,100 
|     | $ | 335,000



The cumulative carry-forward pool of SR&ED expenditures applicable to future years, with no expiry date, is $1,880,800.

The Ontario Harmonization Credit available to the Company over the next five years is $68,100.  The Company has taken a full valuation allowance as they do not meet the more likely than not test.

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.



F-15



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11.

LOSS PER SHARE

The treasury stock method assumes that proceeds received upon the exercise of all warrants and options outstanding in the year are used to repurchase the Company's shares at the average share price during the period. The diluted loss per share has not been calculated for 2008 as the Company was in a loss position and therefore the diluted loss per share would be anti-dilutive.

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

|                                                             |      |            |      |   |           
|------------------------------------------------------------ | ---- | ---------- | ---- | - | ----------
|For the periods ended December 31                            | 2008 |            | 2007
|Net loss per share available to common shareholders          | $    | (31,066)   |      | $ | (147,441) 
|Weighted average Common Shares outstanding                   |      | 23,801,450 |      |   | 23,821,562
|Diluted weighted average number of Common Shares outstanding |      | 23,801,450 |      |   | 23,821,562
|Basic loss per share                                         | $    | 0.00       |      | $ | (0.01)    
|Diluted loss per share                                       | $    |           |      | $ |          



12.

STATEMENT OF CASH FLOWS

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

|                                          |      |           |      |   |          
|----------------------------------------- | ---- | --------- | ---- | - | ---------
|For the years ended December 31           | 2008 |           | 2007
|Accounts receivable                       | $    | (276,714) |      | $ | (72,150) 
|Inventories                               |      | (59,509)  |      |   | (30,443) 
|Prepaids, deposits and sundry receivables |      | (86,449)  |      |   | 11,341   
|Taxes recoverable                         |      | (47,731)  |      |   | (164,714)
|Accounts payable and accrued liabilities  |      | (83,029)  |      |   | 44,250   
|Deferred revenues                         |      | (8,824)   |      |   | 9,073    
|                                          | $    | (562,256) |      | $ | (202,643)
|                                          |      |           |      |   |          

Included in accounts payable at the year ended December 31, 2008, is an amount related to manufacturing equipment purchases of $36,236 (2007 - $1,134).

During the year ended December 31, 2008, there was no interest or tax paid (2007  nil).

13.

CONTINGENCIES AND COMMITMENTS

(a)

Royalty Agreements

In September 2000, the Company entered into a royalty agreement for sales of Uracyst®.   The agreement involved 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 until the end of the agreement on September 30, 2008, at which time this agreement ended. The total royalty payments for the year ended December 31, 2008 were $4,348 (2007 - $5,023). These amounts have been recorded as royalty expense in selling, general and administrative.

Royalty agreements were activated in November and December 2008 upon the signing of each of the European license agreements for sales of Uracyst® in the defined territories.   These agreements involved royalty payments to be issued to the consultants who assisted in acquiring the licensee who signed the license agreements with the Company.  The royalty payments being issued to consultants included 10% of the upfront fees received from the licensee and 10% to 50% of any future milestone payments received.  In addition, royalty payments were also based on 4 to 5% of the total sales of Uracyst at a declining rate of 1% per year over a three to five year period, declining to a 1% rate effective in the final year. The expenses recorded in regards to royalty fees for the year ended December 31, 2008 were $29,605 (2007 - $5,000). These amounts have been recorded as royalty expense in selling, general and administrative.

(b)

License Agreements

In 2008, the Company signed four license agreements for various European territories, to improve penetration into this important market. As provided in these agreements, the Company received $232,600 in non-recurring, non-refundable license fees, which were recognized as income in 2008. 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 these European markets.



F-16



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13.

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.  This agreement was renewed in December 2008, for an additional three years, until December 2011.

(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 Company completed its final manufacturing with Dalton in January 2008. The Companys products are currently being manufactured at Hyaluron Contract Manufacturers in Burlington, Massachusetts, United States, for the manufacture of Stellars NeoVisc® and Draxis Pharma, Inc. in Kirkland, Quebec, Canada, for the manufacture of its Uracyst®.

(e)

Leases

The Company presently leases office and warehouse equipment under operating leases.  For the year ended December 31, 2008 the total expense related to leases was $5,096 (2007 - $3,869).  At December 31, 2008, the remaining future minimum lease payments under operating leases are $14,725.

The Company is obligated to make the following operating lease payments as of December 31, 2008:

|                            |  |         |  |        |  |        |  |       
|--------------------------- |  | ------- |  | ------ |  | ------ |  | ------
|                            |  | Total   |  | 2009   |  | 2010   |  | 2011  
|Operating lease obligations |  | $14,725 |  | $9,629 |  | $5,183 |  | $2,126

(f)

Consulting Agreements

In May 2005, the Company entered into a research and development agreement with a major United States University.  This agreement was extended throughout 2008 for an additional three months and a subsequent four months, until January 2009, for additional research to be preformed.  The program is on Bladder Urothelial research in interstitial cystitis and cost the Company US$265,300 for the period May 2005 to January 2009. During the year, the Company has recorded $34,846 (2007 - $84,871) as research and development costs.

14.

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 in the normal course of business. Compensation under the agreement is $6,000 per month.  The Company has recorded and paid $72,000 (2007 - $72,000) as selling, general and administrative costs.

15.

SIGNIFICANT CUSTOMERS

During the year ended December 31, 2008, the Company had two significant customers that represented 40% (one major wholesaler  28%; and one international customer - 12%) of product sales (2007  36%; one major wholesaler).  The Company believes that its relationship with these customers is satisfactory.

16.

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.



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16.

FINANCIAL RISKS (continued)

(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 ($100,000 per bank). Generally, these deposits may be redeemed upon demand and, therefore, bear minimum risk.

As at December 31, 2008, the Company had five customers which made up 90.8% of the outstanding accounts receivable, in comparison to two customers which made up 67.3% at December 31, 2007.  Of these outstanding accounts receivables 57.5% were related to two customers: the first in regards to clinical products manufactured for Watson at the end of the year, which was $159,015 or 31.9% and the second, $127,529 or 25.6% was related to licensing fees.  With the exception of Watson, the remaining payments were received in full by February 27, 2009.

(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, depending 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, 2008 and 2007.

(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.

17.

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, certain of the Companys manufacturing assets are located in the United States, with a current net book value of approximately $124,282 (2007 - $nil), the Companys remaining 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:

|                               |  |       |  |      
|------------------------------ |  | ----- |  | -----
|                               |  | 2008  |  | 2007 
|NeoVisc                        |  | 69.8% |  | 60.3%
|Uracyst                        |  | 11.3% |  | 11.9%
|BladderChek                    |  | 1.3%  |  | 1.1% 
|Royalty and Licensing Revenues |  | 17.2% |  | 25.9%
|Other                          |  | 0.4%  |  | 0.8% 
|                               |  |       |  |      

Revenue for the years ended December 31, 2008 and 2007 includes products sold in Canada and international sales of products, as well as raw materials sold at cost to the Companys European licensee.  Revenue earned is as follows:

|                      |  |              |           |  |      |          
|--------------------- |  | ------------ | --------- |  | ---- | ---------
|                      |  | December 31,
|Products Sales        |  |              | 2008      |  | 2007
|Canadian market sales |  | $            | 1,504,452 |  | $    | 1,429,921
|International sales   |  |              | 609,634   |  |      | 224,429  
|Other revenue         |  |              | 4,196     |  |      | 10,245   
|Total Product Sales   |  | $            | 2,118,282 |  | $    | 1,664,595





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17.

SEGMENTED INFORMATION (continued)

|                                      |  |              |         |  |      |        
|------------------------------------- |  | ------------ | ------- |  | ---- | -------
|                                      |  | December 31,
|Royalties and Licensing Revenue       |  |              | 2008    |  | 2007
|Licensing fees                        |  | $            | 232,600 |  | $    | 47,413 
|Royalties                             |  |              | 208,530 |  |      | 535,257
|Total Royalties and Licensing Revenue |  | $            | 441,130 |  | $    | 582,670



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.

18.

FOREIGN CURRENCY GAIN (LOSS)

The Company enters into foreign currency transaction in the normal course of business.  During the year ended December 31, 2008, the Company had foreign currency gain (loss) of $40,374 (2007  ($26,675)).  These amounts have been included in selling, general and administrative expenses.

19.

COMPARATIVE FIGURES

Certain comparative figures in 2007 have been reclassified to conform to the current year's presentation, in accordance with generally accepted accounting principles of the United States. The reclassified information is as follows:

Reclassification of Operations and Comprehensive Loss for December 31, 2007

|                                    |  |                     |           |                          |   |                 |  |   |          
|----------------------------------- |  | ------------------- | --------- | ------------------------ | - | --------------- |  | - | ---------
|                                    |  | As previously
filed |           | Reclassified
Adjustments |   | Adjusted
Values
|PRODUCT SALES                       |  | $                   | 1,664,595 |                          | $ |                |  | $ | 1,664,595
|COST OF PRODUCTS                    |  |                     | 405,512   |                          |   | 113,779         |  |   | 519,291  
|MARGIN ON PRODUCTS SOLD             |  |                     | 1,259,083 |                          |   | (113,779)       |  |   | 1,145,304
|ROYALTIES & LICENSING REVENUE       |  |                     | 582,670   |                          |   |                |  |   | 582,670  
|WRITE-DOWN OF OBSOLETE INVENTORY    |  |                     | (20,145)  |                          |   | 20,145          |  |   |         
|OTHER PRODUCT COST                  |  |                     |          |                          |   |                |  |   |         
|GROSS PROFIT                        |  |                     | 1,821,608 |                          |   | (93,634)        |  |   | 1,727,974
|EXPENSES                            |  |                     |           |                          |   |                 |  |   |          
|Selling, general and administrative |  |                     | 2,090,517 |                          |   |                |  |   | 2,090,517
|Research and development            |  |                     | (55,268)  |                          |   |                |  |   | (55,268) 
|Amortization                        |  |                     | 146,847   |                          |   | (93,634)        |  |   | 53,213   
|                                    |  |                     | 2,182,096 |                          |   |                |  |   | 2,088,462
|LOSS FROM OPERATIONS                |  | $                   | (360,488) |                          | $ |                |  | $ | (360,488)





F-19



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19.

COMPARATIVE FIGURES (continued)

Reclassification of Property, Plant and Equipment for December 31, 2007

|                        |  |                                      |           |                           |   |                          |  |      |         |                          |   |          |  |                          |         |                     |   |           |  |   |         |  |   |        
|----------------------- |  | ------------------------------------ | --------- | ------------------------- | - | ------------------------ |  | ---- | ------- | ------------------------ | - | -------- |  | ------------------------ | ------- | ------------------- | - | --------- |  | - | ------- |  | - | -------
|As at December 31       |  |                                      |           |                          
|                        |  | Values as Stated in Prior Statements |           | Reclassified Adjiustments |   | Adjusted Values for 2007
|                        |  | Cost                                 |           | Accumulated Amortization  |   | Net Carrying Amount      |  | Cost |         | Accumulated
Amortization |   | Cost     |  | Accumulated
Amortization |         | Net Carrying Amount
|Land                    |  | $                                    | 90,000    |                           | $ |                         |  | $    | 90,000  |                          | $ |         |  | $                        |        |                     | $ | 90,000    |  | $ |        |  | $ | 90,000 
|Building                |  |                                      | 586,954   |                           |   | 86,757                   |  |      | 500,197 |                          |   |         |  |                          |        |                     |   | 586,954   |  |   | 86,757  |  |   | 500,197
|Office equipment        |  |                                      | 40,495    |                           |   | 33,115                   |  |      | 7,380   |                          |   |         |  |                          |        |                     |   | 40,495    |  |   | 33,115  |  |   | 7,380  
|Manufacturing equipment |  |                                      | 620,826   |                           |   | 469,060                  |  |      | 151,766 |                          |   | (33,075) |  |                          | (2,205) |                     |   | 587,751   |  |   | 466,855 |  |   | 120,896
|Warehouse equipment     |  |                                      | 27,608    |                           |   | 1,216                    |  |      | 26,392  |                          |   | (14,673) |  |                          | (209)   |                     |   | 12,935    |  |   | 1,007   |  |   | 11,928 
|Packaging equipment     |  |                                      |          |                           |   |                         |  |      |        |                          |   | 47,748   |  |                          | 2,414   |                     |   | 47,748    |  |   | 2,414   |  |   | 45,334 
|Computer equipment      |  |                                      | 116,735   |                           |   | 69,778                   |  |      | 46,957  |                          |   |         |  |                          |        |                     |   | 116,735   |  |   | 69,778  |  |   | 46,957 
|                        |  | $                                    | 1,482,618 |                           | $ | 659,926                  |  | $    | 822,692 |                          | $ |         |  | $                        |        |                     | $ | 1,482,618 |  | $ | 659,926 |  | $ | 822,692





F-20